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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.
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
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.
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.
nomic profit
investment resources.