Difference between Accounting and Economic Profit

For most people profit means excess of revenue over cost, however there are two kinds of profits – accounting and economic profit and here are some of the differences between the two –

1. Accounting profit can be defined as the difference between total revenue and total cost while economic profit is defined as the difference between total revenue and total cost as well as opportunity cost (Opportunity cost is defined as the cost of the profits you forgo by not doing another activity.)

2. For example if one has invested $200000 in the business and he earns $50000 of revenues and $20000 is the total costs then accounting profit would be $30000 and suppose rate of interest for depositing money in bank is 5 pc then opportunity cost would be $10000 (200000*5/100) and economic profit would be $20000.

3. While accounting profit is calculated as revenue minus explicit costs while economic profit is calculated as revenue minus explicit and implicit costs. In other words economic profit will be less than that of accounting profit. Hence it can be said that economic profit is a better measure for judging the financial position of the company because it includes all the costs in its calculations.

2 comments… add one
  • Solomon

    Pls I love ur explanations and I will love to get a simplified economics textbook from you.p l e a s e !

Leave a Comment


Related pages


capitalism socialism mixed economydefine conglomerate in economicsdirect quote fxwhat are the disadvantages of socialismexplain debenturesfull disclosure principle accountingdisadvantages of centrally planned economydisadvantage of command economyskimming pricing examplesdemand loan interest ratemanufacturing overheadsbenefits of centrally planned economydisadvantages of venture capital financingcurrent liabilities definition in accountingunearn revenuemonopolistic competitionsadvantages of authoritarian leadership styledifferentiate between assets and liabilitiesforex reserve meaningmonopolistic competition examples companiesdimeritsnormal goods examplesexamples of durable and nondurable goodsfull form of neft & rtgscheque vs draftadvantages of decentralized organizationtraditional economy advantages and disadvantagesfinancial management advantages and disadvantagesmeaning of demand depositsmixed economy merits and demeritsdisadvantages capitalismadvantage and disadvantage of perfect competitionexample of congeneric mergerfii and fdidefinition of skimming pricingdefine inferior goodswhat is promissory note and bill of exchangeperpetual succession meaninglimitation of capital budgetingar securitizationadvantages of autocracy governmentbenefits of cashless policywho is an autocratic leaderexplain privatizationconglomerate mergerwhats a direct quoteadjusting entry for unearned rentcibil score 800examples of primary industriesunitary elasticity exampleloans advantages and disadvantageslifo disadvantagesautocratic companiesdefinition of forfeitingadvantages of vertical mergerdiminishing law of returnse trading advantages and disadvantagesdefine derivatives in financewhat is the disadvantage of globalizationdisadvantages of cash budgetfeatures of derivative marketborder fence pros and consadvantages and disadvantages of commodity exchangeintermediate goods definition economicsdifference between cartage and freightpayback period meaningcapitalism positivesmeaning of pros and cons in hindidupont system roeipo price of moilwhat is full form of micrmeaning of cagr