Accounting Rate-of-Return Method Meaning

Accounting glossary · Understand, connect, apply

The accounting rate-of-return method evaluates an investment using average annual accounting profit divided by an investment base.

Example

Average annual profit of 6,000 divided by average investment of 30,000 gives an accounting rate of return of 20%.

Remember the difference

Some courses use initial investment instead of average investment. State the formula used; this method does not discount cash flows.

Browse the accounting glossary → · Follow a learning path

Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.

Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.

← Return to the accounting glossary