Accounting Profit vs. Economic Profit: What's the Difference?
Edited by Aimie Carlson || By Janet White || Published on February 14, 2024
Accounting profit is the net income after subtracting explicit costs; economic profit deducts both explicit and implicit costs from total revenue.
Key Differences
Accounting profit, a financial metric, is calculated by deducting explicit costs (like wages, rent, and materials) from total revenue. Economic profit goes a step further, subtracting both explicit and implicit costs (like opportunity costs) from total revenue. The key difference lies in the inclusion of implicit costs in economic profit.
Accounting profit is regularly reported in financial statements and focuses on actual monetary transactions. It adheres to standardized accounting principles. Economic profit, however, includes non-monetary factors and is not typically featured in standard financial reports. It provides a more comprehensive view of a company's profitability by considering potential income from alternative investments.
Businesses rely on accounting profit to evaluate financial performance and meet regulatory requirements. It offers a snapshot of fiscal health. Economic profit, on the other hand, is crucial for strategic decision-making, as it assesses overall economic efficiency by accounting for the cost of missed opportunities.
Accounting profit is pivotal for tax purposes and managing day-to-day operations. It's a measure of financial success. In contrast, economic profit serves as a tool for long-term strategic planning, guiding businesses on where to allocate resources for optimal economic benefit.
Shareholders and creditors often focus on accounting profit for investment and lending decisions. It's a direct indicator of financial success. Economic profit, however, is of interest to management and investors looking to understand the business's potential in the context of alternative opportunities.
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Comparison Chart
Cost Consideration
Only explicit costs are subtracted from revenue.
Both explicit and implicit costs are subtracted from revenue.
Calculation Method
Based on standard accounting principles.
Includes theoretical and non-monetary factors like opportunity cost.
Financial Reporting
Regularly reported in financial statements.
Not typically reported in standard financial reports.
Purpose and Use
Used for tax purposes and operational assessment.
Used for strategic planning and assessing economic efficiency.
Relevance to Business Decisions
Critical for short-term financial health and regulatory compliance.
Important for long-term strategic decisions and resource allocation.
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Accounting Profit and Economic Profit Definitions
Accounting Profit
Accounting profit is the earnings from business operations.
The new product line significantly contributed to the company's operational earnings and accounting profit.
Economic Profit
Economic profit includes both explicit costs and the opportunity cost of capital.
Despite good sales, the company's economic profit was low due to high opportunity costs.
Accounting Profit
Accounting profit is the net income after deducting all operating expenses and costs from total revenue.
The company's accounting profit increased after reducing its operational costs.
Economic Profit
It's an indicator of overall economic efficiency beyond just financial transactions.
The firm's low economic profit suggests it could allocate resources more efficiently.
Accounting Profit
Accounting profit is a measure of financial profit calculated using explicit costs.
Their accounting profit reflects solid financial performance this quarter.
Economic Profit
It accounts for the cost of all resources used, including alternatives.
Their economic profit was negative, indicating inefficient resource utilization.
Accounting Profit
It represents the bottom line of an income statement.
A surge in sales boosted the company's accounting profit, improving its bottom line.
Economic Profit
Economic profit measures the profitability considering potential alternative investments.
Investing in new technology reduced their economic profit, as it didn't outweigh the returns from market investments.
Accounting Profit
It is the profit after explicitly accounting for all business expenses.
After paying salaries and rent, the firm's accounting profit was remarkable.
Economic Profit
Economic profit considers both explicit and implicit costs in its calculation.
After accounting for implicit costs like brand value, their economic profit was considerably less.
FAQs
What is accounting profit?
It's the net income of a business after deducting explicit costs from total revenue.
Do companies report economic profit in financial statements?
No, economic profit is not typically reported in standard financial reports.
Why is accounting profit important?
It's crucial for tax purposes, regulatory compliance, and assessing operational success.
What happens if economic profit is negative?
It indicates a company might be better off investing resources elsewhere.
How is accounting profit calculated?
By subtracting all operational expenses from the total revenue of a business.
What makes economic profit different in calculation?
It subtracts opportunity costs and other implicit costs, in addition to explicit costs, from revenue.
Why is economic profit significant?
It aids in strategic decision-making by considering the cost of forgone opportunities.
Is accounting profit a short-term or long-term measure?
It's primarily a short-term measure of financial health.
What defines economic profit?
Economic profit is the surplus after subtracting both explicit and implicit costs from revenue.
Is accounting profit shown in financial statements?
Yes, it's regularly reported in income statements.
Can a business have high accounting profit and low economic profit?
Yes, if the implicit costs, like opportunity costs, are high.
Can accounting profit be negative?
Yes, if a company's expenses exceed its revenue.
Does economic profit affect investment decisions?
Yes, especially for long-term strategic investments.
What role does accounting profit play for investors?
It's a key indicator of a company's financial success and stability.
How does economic profit influence business strategy?
It guides long-term planning and resource allocation by including potential income from alternatives.
What’s an example of an implicit cost in economic profit?
Opportunity cost, like the return from an alternative investment, is an implicit cost.
Does accounting profit affect a company's stock value?
Yes, as it's a direct indicator of financial performance.
How do stakeholders view economic profit?
It's used to assess the company's overall economic efficiency and potential.
Are explicit costs the same in both accounting and economic profit?
Yes, explicit costs like rent and wages are considered in both.
Can a company have positive accounting and economic profit simultaneously?
Yes, if it efficiently manages both its explicit and implicit costs.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
