Irish Calculators
Business

Accounting Rate of Return Calculator

Compare average annual accounting profit with the selected investment base. Keep profit policies and annual periods consistent; this accounting ratio does not weight the timing of cash flows.

Runs privately in your browserMethod reviewed

Your numbers

One annual accounting profit per row, after depreciation and the applicable accounting charges. Losses may be negative; no headers.
Your figures stay on this device.

How the calculation works

Compare average annual accounting profit with a clearly selected investment base. This accounting rate of return calculation supports initial-investment and average-investment conventions, which can produce different percentages from identical profit figures.

ARR = average annual accounting profit / selected investment base × 100. Average investment base = (initial investment + residual value) / 2.

  1. Average annual profits

    Add all annual profit observations and divide by the number of years entered. Periods should have equal annual length and follow a consistent accounting policy.

  2. Establish the investment base

    Use initial investment directly, or add initial and residual values and divide by two. The selected denominator must be positive for a meaningful percentage.

  3. Calculate accounting return

    Divide average annual accounting profit by the selected base and multiply by 100. Preserve losses rather than excluding unfavourable years from the average.

Worked example: Initial investment convention

Sample inputs demonstrate the method. They are not a forecast or product offer.

Annual profits of €10,000, €20,000 and €30,000 average €20,000. The first example divides that by initial investment of €100,000, giving 20%. No time-value discounting is applied to those annual profits.

Annual accounting profits
10000 20000 30000
Initial investment
100000
Investment convention
Initial investment

Expected result

Average annual accounting profit
€20,000.00
Accounting rate of return
20%
Worked example: Average investment convention

Sample inputs demonstrate the method. They are not a forecast or product offer.

Annual accounting profits
10000 20000 30000
Initial investment
100000
Investment convention
Average initial and residual investment
Residual investment value
20000

Expected result

Investment denominator
€60,000.00
Accounting rate of return
33.33%

Understanding your result

The percentage measures accounting earnings relative to the selected investment convention. A smaller average-investment denominator produces a larger ARR without changing the underlying profits.

ARR does not discount when cash flows occur. It is not internal rate of return, a total holding-period ROI or annual recurring revenue, despite sharing an abbreviation with the last measure.

Questions you might have

Should I enter cash receipts instead of profits?

No. Accounting ARR uses profit after the relevant accounting charges. A cash-flow evaluation should use an appropriate cash-flow measure such as NPV or IRR.

Choosing the right inputs

Annual accounting profits
Enter one annual accounting profit per row, including negative years where applicable. Use profit after the relevant accounting charges rather than gross cash receipts.
Investment convention
Choose the convention required for the comparison. Initial investment and average initial-and-residual investment are different denominators, not interchangeable labels.
Residual investment value
In average-investment mode, supply the remaining investment value at the end. This model assumes a steadily declining investment balance between initial and residual amounts.

Common mistakes to avoid

  • Do not mix accounting profits with cash-flow amounts or use unequal reporting periods as though every row represented one year.
  • Do not compare two projects' ARR percentages without checking whether they use the same investment denominator.

Assumptions to check

  • Use amounts in one currency and one reporting period. Results are labelled EUR; the arithmetic also works for another consistent currency.
  • Profit inputs must follow a consistent accounting policy and annual period length. The average-investment convention assumes a steadily declining investment balance.

Sources and method

Read our calculation and testing approach.