Basic Accounting Knowledge: Economic Profit

According to the concept of economic profit, profit is calculated through the net assets at the end of the business and compared with the value at the beginning.

For example, an enterprise's net assets at the end of the year are 80000 yuan, and its initial net assets are 76000 yuan, and its earnings are 4000 yuan (80000-76000) without the paction with the owners.

If the issue amount is 10000 yuan and the dividend payment is 8000 yuan, the profit will be 2000 yuan (80000-76 000- (10000-8000)).

The difficulty in calculating economic profits is the measurement of net assets at the beginning and end of the year.

(1) capitalization value of future cash flows that are expected to be received during the period of existence of an enterprise;

(2) the total selling price of all kinds of assets minus the total amount of liabilities.

(3) the number of shares issued by an enterprise is multiplied by the market price determined by the market.

(4) the input value (original or current cost) of an enterprise's non monetary assets, plus the cash value of monetary assets, minus liabilities.

All of the above methods have their rationality and feasibility, but they are accompanied by corresponding defects.

The amount of economic profit varies from the beginning to the end of the year.

The main advantage of economic profit is that it is more explanatory than accounting profits.

That is, net assets (or capital) are the amount of storage of a company's wealth at a certain time, and profits are the amount that flows out of the wealth in a certain period.

Only the amount of outflow beyond storage can be regarded as profit.

The determination of economic profit requires the valuation of all or specific assets and liabilities at the beginning of each period and at the end of each period.