Calculate Accounting Rate of Return

The accounting rate of return (AROR) is a financial metric used to evaluate the profitability of an investment. Unlike the economic rate of return, AROR accounts for the time value of money by discounting future cash flows to their present value. This calculator helps you compute AROR quickly and accurately.

What is Accounting Rate of Return?

The accounting rate of return measures the profitability of an investment by comparing the net income generated by the investment to its cost. It's commonly used in accounting and financial reporting to assess the performance of assets and investments.

Key characteristics of accounting rate of return include:

It's calculated on a per-period basis (annually, quarterly, etc.)
It doesn't account for the time value of money
It's often used for short-term investments and assets
It's simpler to calculate than the economic rate of return

How to Calculate Accounting Rate of Return

To calculate accounting rate of return, you'll need two key pieces of information:

The net income generated by the investment
The cost of the investment

The basic formula is straightforward: divide the net income by the investment cost, then multiply by 100 to get a percentage.

Accounting Rate of Return Formula

AROR = (Net Income / Investment Cost) × 100

For example, if an investment costs $10,000 and generates $1,200 in net income, the accounting rate of return would be:

AROR = ($1,200 / $10,000) × 100 = 12%

Accounting Rate of Return Formula

The formula for calculating accounting rate of return is:

Accounting Rate of Return = (Net Income / Investment Cost) × 100

Where:

Net Income = Revenue - Expenses
Investment Cost = Initial cost of the investment

This formula provides a simple percentage that represents the return on the investment based on accounting principles.

Accounting Rate of Return vs. Economic Rate of Return

While both metrics measure investment performance, they differ in key ways:

Accounting Rate of Return	Economic Rate of Return
Does not account for time value of money	Accounts for time value of money
Calculated on a per-period basis	Calculated over the entire investment period
Simpler to calculate	More complex calculation
Commonly used in accounting and financial reporting	Commonly used in capital budgeting decisions

Understanding these differences helps investors choose the right metric for their specific needs.

Practical Applications

The accounting rate of return has several practical applications in finance and accounting:

Evaluating the profitability of assets and investments
Comparing the performance of different investments
Assessing the efficiency of business operations
Making investment decisions based on historical performance

While it's a useful metric, it's important to consider it alongside other financial measures for a complete picture of investment performance.

FAQ

What is the difference between accounting rate of return and economic rate of return?: The accounting rate of return is calculated on a per-period basis and doesn't account for the time value of money, while the economic rate of return considers the time value of money and is calculated over the entire investment period.
When should I use accounting rate of return instead of economic rate of return?: Accounting rate of return is typically used for short-term investments and assets, while economic rate of return is more appropriate for long-term investments and capital budgeting decisions.
Can accounting rate of return be negative?: Yes, accounting rate of return can be negative if the net income generated by the investment is less than the investment cost.
Is accounting rate of return the same as return on investment (ROI)?dt>: While similar, accounting rate of return is calculated on a per-period basis, while ROI is typically calculated over the entire investment period. Both metrics measure the profitability of an investment.
How often should I calculate accounting rate of return?: The frequency of calculating accounting rate of return depends on the investment. For short-term investments, it may be calculated annually or quarterly, while for long-term investments, it may be calculated less frequently.