Accounting vs Economic Profit

Many people think that profit is the revenue one gets after the costs have been deducted, but many of us are not aware that there are two kinds of profits ‘“ accounting profits and economic profits. Well, the two profits ‘“ economic and accounting -have certain differences between them.

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.

Economic profit is obtained when the revenue exceeds the opportunity’s cost. On the contrary, a firm can be said to have accounting profits if the revenue exceeds the accounting cost of the firm. In other words, accounting profit can be referred to as the revenue obtained by a firm after all the economic costs are met.

One of the differences that can be seen, is that the economic profit will always be lesser when compared to accounting profits. When compared to economic profit, the accounting profits are only given during leap years.

When considering accounting profits, it is defined as the revenue deducted from the explicit costs, and economic profits, as the revenue deducted from explicit and implicit costs.

When calculating accounting profits, the things that are considered include leased assets, non-cash adjustments/transactions for depreciation, provisions, allowances, and capitalising development costs. When calculating economic profits, several things, like opportunity costs, residual value, inflation level changes, tax rates, and interest rates on cash flow, are taken into account.

When compared to economic profits, accounting profit is calculated for a certain period of time.

Summary:

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

2. Accounting profit can be defined as the revenue deducted from the explicit costs, and economic profits, as the revenue deducted from explicit and implicit costs.

3. When compared to economic profits, accounting profit is calculated for a certain period of time.

4. Economic profit will always be lesser when compared to accounting profits. In comparison with economic profit, the accounting profit is only given during leap years.

5. Accounting profit can be called as the revenue obtained by a firm after all the economic costs are met. A firm can be said to have accounting profits if the revenue exceeds the accounting cost of the firm.