Book profit is a kind of profit that has not been realized on investment. Book profit happens when the current price of an asset is higher than the purchase price, but the owner of an asset still owns(holds) the security. As a result, there is the likelihood that the book profit may decrease in case of a price drop. In order to calculate the book profit for an asset the following formula is used :
In most countries, book profit is not taxable; the tax amount is collected when gains and losses are realized. Also known as unrealized profit or unrealized loss or paper profit or paper loss.
Importance of Book profit
The finding of the study conducted by Alhadab and Tahat highlight the importance of unrealized gain to investors. The outcomes show that investors undervalue the business that reports unrealized losses and gains in their comprehensive income statements in the pre and post-crisis periods. The way that the unrealized gains and losses that published in the are considered to be a major root cause of the recent financial credit crisis in 2008 .
The variances between book profit and tax base are powerful and this may be observed in medium and large enterprises. Nonetheless, it is rather complicated to highlight any trends since the direction and the scale of the variations differ remarkably across companies .
Difference between net porfit and book profit
Net income, also called net profit or net earnings, is a concrete concept. The figure that most comprehensively reflects a business' profitability while book profit only represent the unrealized profit or loss due to market fluctuation.
The net income of a business is the outcome of a number of computations, starting with revenue and including all expenses and revenue streams for a given point. All the cash that flows in and out of a company is accounted for as a sum. This covers costs for the manufacture of products; debt payments; operating expenses; interest paid on credits; further income streams from subsidiary holdings or the sellout of assets; depreciation and amortization of assets; taxes.
On the other hand, book profit only represents the potential profit due to price movements on the market for a given set of assets.
- Webster, T. (2015).
- (Alhadab and Tahat, 2016)
- Leszczylowska, 2014
- Alhadab, Mohammad and Tahat, Yasean. (2016). The value relevance of unrealized gains and losses around the financial credit crisis: Evidence from the UK. Corporate Ownership and Control. 14. 10.22495/cocv14i1c2p7.
- Boulland, R., Lobo, G. and Paugam, L. (2019). Investors Pay Sufficient Attention to Banks’ Unrealized Gains and Losses on Available-for-sale Securities? European Accounting Review, pp.1-30.
- Kolev, K. (2010), Investors Perceive Marking-To-Model As Marking-To-Myth? Working Paper. New York University
- Leszczylowska, Anna. (2014). The Relationship Between Book Profit And Taxable Income From A Research Perspective - Evidence Based On Corporations in Poland. International Journal of Economics and Management.
- Webster, T. (2015). Managerial economics.
Author: Mariia Gordiyenko