Accounting Return

The Accounting Return = Average Profit/Capital Outlay.

For example:
A firm invests $100,000 in a new machine, and the average extra after tax income earned is $25,000 per annum for five years. Then the accounting rate of return = 25,000/100,000 = 25% per annum.

The accounting rate of return suffers from two major drawbacks:

1. The calculation of profit is subject to arbitrary adjustments, and therefore the accounting rate of return can be "adjusted".

2. The accounting rate of return takes no account of the time value of money.

Reference Pages

Return on Capital Employed

Return on Equity

Return on Invested Capital

Return on Total Assets