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Economic Profit and Accounting Profit

帮考网校2020-08-06 14:40:16

Economic profit and accounting profit are two different concepts used to measure the financial performance of a business.

Accounting profit is the difference between a company's total revenue and total expenses, including both explicit and implicit costs. This is the profit that is reported on a company's financial statements and is calculated by subtracting all expenses from revenue.

On the other hand, economic profit takes into account both explicit and implicit costs, including the opportunity cost of the resources used in the business. Opportunity cost is the cost of the next best alternative foregone when a decision is made. Economic profit is calculated by subtracting all explicit and implicit costs from revenue.

If economic profit is positive, it means that the business is generating more revenue than it would if the resources were used in their next best alternative. This indicates that the business is creating value and is profitable in the long run. If economic profit is negative, it means that the business is not generating enough revenue to cover all of its costs, including the opportunity cost of the resources used. This indicates that the business is not profitable in the long run.

In summary, accounting profit only considers explicit costs, while economic profit considers both explicit and implicit costs, including opportunity cost. Economic profit provides a more accurate measure of a business's profitability in the long run, as it takes into account all costs associated with the business.

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Economic Profit and Accounting Profit

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