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Accounting profit refers to the Gross revenue minus the explicit costs (deductible expenses). For e.g.

Mrs. ‘B’ is running a pastry shop and is required to maintain a track of their earnings.

If the total revenue is $300,000 and the explicit costs are $50,000 then accounting profit will be
$300,000 – $50,000 = $250,000.

Economic Profit involves subtraction of both Implicit costs and Explicit costs from the Total Revenue.
Implicit costs are the opportunity costs which are not measurable and not seen in the books of accounts
as well. Extending the example above, the implicit costs shall include the loss in case Mrs. ‘B’ was
working for someone else or the potential interest one could earn if the money of the pastry shop is
invested elsewhere. The concept of implicit revenue also comes in the frame such as the value of having
own business.

Say, if the implicit cost was $75,000 and the implicit revenue was $30,000, then economic profit will
be: $300,000 + $30,000 – $50,000 – $75,000 = $205,000

The basis of Comparison between accounting profit and economic profitAccounting ProfitEconomic
ProfitMeaningNet income earned during an accounting yearSurplus remaining after deduction of total
costs from total revenue.RelevancePractical from financial perspectiveMay was not the precise picture
since certain aspects are estimatedBenefitReflects profitability of the firmHighlights efficiency of the
company in resource allocations.FormulaTotal Revenue – Explicit costTotal Revenue – (Explicit costs +
Implicit costs)

The entire future of any company depends on the profit earning potential in the near future and also
how has it performed in the recent past. As a shareholder/investor, the accounting profit is of
importance as that will give the true picture of the financial performance. Economic profit may be used
for internal analysis or by specific individuals to assess the opportunity costs which are making way for
current activities. Though economic profits can involve a lot of assumptions, it can give an approximate
answer of the desired direction.

Accounting profit is the difference between the total revenue and the total cost, excluding the cost of
the opportunity. On the other hand, economic cost is the difference between the total revenue and the
total cost, including the cost of the opportunity

Accounting profit is the net income that a company generates, found at the bottom of its income
statement. The figure includes all revenue the company generates and deducts all expenses to arrive at
the bottom line.
Accounting Profit

Accounting profit is the difference between total monetary revenue and total monetary costs, and is
computed by using generally accepted accounting principles (GAAP). Put another way, accounting profit
is the same as bookkeeping costs and consists of credits and debits on a firm's balance sheet. These
consist of the explicit costs a firm has to maintain production (for example, wages, rent, and material
costs). The monetary revenue is what a firm receives after selling its product in the market.

Accounting profit is also limited in its time scope; generally, accounting profit only considers the costs
and revenue of a single period of time, such as a fiscal quarter or year.

Economic Profit

Economic profit is the difference between total monetary revenue and total costs, but total costs
include both explicit and implicit costs. Economic profit includes the opportunity costs associated with
production and is therefore lower than accounting profit. Economic profit also accounts for a longer
span of time than accounting profit. Economists often consider long-term economic profit to decide if a
firm should enter or exit a market.

Difference Between Accounting, Economic and Normal Profit

Last updated on July 26, 2018 by Surbhi S

In simple terms, profit can be understood as all the income that is received by an individual. It is the
lifeline of the business, as, without profit, the survival is difficult, rather impossible. In accounting, profit
means surplus, i.e. the excess of total revenue over the expenses. Such a profit is known as accounting
profit. On the other hand, in economics, you might have heard the term economic profit, which is
nothing but the amount left over after deducting all implicit and explicit costs.

When we talk about business, there is the least amount of profit required for its survival, which is known
as normal profit. In short different disciplines defines profit differently, which one must know while
working on profits. In this article excerpt, we have discussed some fundamental differences between
accounting, economic and normal profit.
Content: Accounting Profit Vs Economic Profit Vs Normal Profit

Comparison Chart

Definition

Key Differences

Conclusion

Comparison Chart

BASIS FOR COMPARISONACCOUNTING PROFITECONOMIC PROFITNORMAL PROFITMeaningAccounting


Profit is the net income of the company earned during a particular accounting year.Economic Profit is
the remaining surplus left after deducting total costs from total revenue.Normal Profit is the least
amount of profit needed for its survival.CalculationAccounting Profit = Total Revenue - Total Explicit
CostEconomic Profit = Total Revenue - (Total Explicit + Total Implicit Cost)Total Revenue = Total Cost (i.e.
explicit and implicit)AdvantageReflects the Profitability of the company.Shows how well the company is
allocating its resources.Helpful in knowing the future prospects of the company.

Definition of Accounting Profit

The actual profit earned by the company during a particular financial year is known as Accounting Profit.
The profit is obtained by deducting the total explicit cost from total revenue. Here explicit cost means
the directly ascertainable cost spent on account of running a business, i.e. rent on land and building, the
wages of labor, salary for employees, interest on capital invested, etc.

The Accounting Profit is also known as net income or the bottom line. It appears in the last line of the
income statement, and it is reported at the end of the financial year. This profit is the residual income
left for distribution to shareholders of the company.

Definition of Economic Profit


Economic Profit also referred as extra profit or supernormal profit. It is the difference between total
revenue earned by the company and the total costs (explicit as well as implicit). Explicit costs as
explained above is the operating costs incurred while conducting the business activities. Implicit cost is
the opportunity cost, i.e. the option forgone by the firm while investing the money somewhere else or
using some other option. Implicit cost is also known as implied or imputed cost.

The economic profit is used by the economists to measure the financial position of the company. Along
with that, it helps in forecasting the future performance. It works as a yardstick in judging the efficiency
and effectiveness of the company’s profitability.

Accounting Profit

Suppose you run a cake decorating business. You need to keep track of your accounting so that you can
report your earnings. Accounting profit is one of the critical numbers that potential investors, as well as
the IRS, will be looking at. This is the number that is used when you file your taxes. It is your gross
revenue minus your explicit costs. Explicit costs are all your deductible expenses. For example, your total
revenue for last year is $250,000, and your explicit costs are $25,000. Your accounting profit is $250,000
- $25,000 = $225,000.

Economic Profit

Your economic profit is a little bit different. This number subtracts both your explicit costs and your
implicit costs from your total revenue. Your implicit costs include costs that aren't seen on paper.
Implicit costs are also called opportunity costs. These costs include things like how much you would be
able to earn at another job, or the potential interest you could earn if you invested your company's
money elsewhere. Implicit costs also incorporate the costs of owning your own buildings or machines.
Along with implicit costs, you can also have implicit revenues, like the value of being your own boss. This
may be worth quite a bit of money to you. This is added to your total revenue.

Returning to your cake decorating business, your total revenue for last year was $250,000. Your explicit
costs were $25,000. Your implicit cost was $60,000 (your salary if you were working for somebody else).
Your implicit revenue was $20,000 (the financial value of being your own boss). Your economic profit is
$250,000 + $20,000 - $25,000 - $60,000 = $185,000. (total revenue + implicit revenue - explicit costs -
implicit costs = economic profit)
As you can see, your economic profit is much less than your accounting profit. You can also see that
being your own boss allows you to earn much more than working for someone else.

Now, the question remains, why do you need both of these numbers? Well, the first, your accounting
profit, is obvious. You need it for taxes and to show investors. Your economic profit, on the other hand,
is more useful as a means to judge whether a certain business is worth it from more than a financial
standpoint.

In order to comprehend difference between

economic profit and accounting profit, it is required

to specify objectives of this concepts’ definition.

Accounting profit is defined based on its objective,

namely report submission of the enterprise’s perfor-

mance. Therefore, calculation of implicit costs in

the balance sheet does not seem reasonable. When

an accountant submits report of income, expenses

and business profits, implicit costs as opportunity

cost of the missed options are never been studied

because it is against the accepted principles of ac-

counting. In contrast, purpose of economic profit is

to submit a decision-making criterion for economic

businesses and investors. Since behavioral analysis

of economic unit is of requirements of profit analy-

sis, analyzing cost-benefit is highly important, so

that decision-making criterion in analyzing market

structure and continuum of activities of a business

or interrupting it is based on cost-benefit analy-

sis and finally positivity or negativity of economic

profit (Awma, 1998). Moreover, view of economists

differs with view of accountants, so that economic


profit and accounting profit will not be the same.

Accountants mostly tend to take into account “ex-

plicit costs of production” means all costs of daily

wage, management, interest and raw materials as

cost of production. But economists take into ac-

count “opportunity cost” or “implicit cost” in ad

dition to paid and explicit costs. For example, when

a manufacturer owns a manufacturing unit, no rent

is paid in order to use it, so that production cost for

rent is zero in accounting terms. From an economic

perspective, since this manufacturer has the oppor-

tunity to rent his manufacturing place to any eco-

nomic agent and receives rent and he is not able to

acquire this amount of money at the moment, the

rent is lost, opportunity cost is using the building

and it is considered as costs of production in terms

of economic, so that the difference between eco-

nomic profit and accounting profit are essentially

costs of capital that the accountant cannot subtract

costs of capital in profit calculation. In contrast, the

economists consider opportunity cost which have

been invested for shareholders of the capital.

Among economists, profit has a broader con-

cept though (Mankio, 2008, p.270). In short, it is

possible to say that accounting profit is difference

between income and explicit costs of doing issues

but economic cost is difference between income and

implicit and explicit costs.


Explicit costs- Income = Accounting profit

(Implicit costs + Explicit costs) – Income= Eco-

nomic profit

These two equations can be rewritten as follows:

Accounting depreciation – Explicit costs- In-

come = Net accounting profit

Economic depreciation – Explicit and implicit

costs- Income = Net economic profit

One can conclude, since accounting profit has

generally more evidences; it can be more reliable com-

paring to economic profit, but economic profit consid-

ers all aspects, and it is more relevant than accounting

profit. Consequently, using both profits can have more

effectiveness. When a business studies an investment

project, it firstly looks for estimating economic profit.

The mentioned economic profit is estimated using in-

put flows (incomes) and outputs (costs). The business

should pay in cash the final price of acquiring required

assets. This payment shows a missed opportunity cost

which could be used for more efficient alternative op-

tions. Hence, the business should measure future net

costs. Clearly, accounting profit does not reflect initial

need for input and output flows of cash money in the

future years and it is merely for economic profit that

reflects real cash transactions related to investment

projects. The investors are seeking high reliability of

input flows in their analysis in order to guarantee the


primary investment and approach of economic profit

can fulfill management analysis of the investment.

To calculations’ view, the economic profit has

less calculation ambiguity compared to the account-

ing profit. There are a number of various methods

for available sharing in the stocks, cost allocation

and calculating depreciation to calculate account-

ing profit, so that different net profits will be gained

as accounting procedures. Obviously, an economic

approach which is based on valuing a project is not

more than this circumstance and it holds an ac-

counting approach. In the end, the economic profit

focuses on “time value of money” by denying its

own calculations, whereas it ignores accounting ap-

proach of it. Reference to usual regulations of ac-

counting, invoice is registered as an income while

this document may stay there untouched for months

and years without flow of any cash money. In con-

trast, costs are registered upon being fulfilled with-

out any real payments.

However, although accounting profit is a very

useful criterion to assess performance, it is not a

complete criterion for decision-making. Thus, from

perspective of capital management, an economic

approach can supply a better basis to estimate future

investment resources.

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