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SeekingKnowelgeFromYou asked:


What is the difference between economic profit and accounting profit, and how does this difference matter for actual business decisions?

Category: Economics by admin

2 Responses to “What is the difference between economic profit and accounting profit?”

1. Kakashi S, on November 3rd, 2008 at 5:37 am Said:

   An economic profit arises when its revenue exceeds the total (opportunity) cost of its inputs, noting that these costs include the cost of equity capital that is met by “normal profits.” A business is said to be making an accounting profit if its revenues exceed the accounting cost the firm.[1] Economics treats the normal profit as a cost, so when deducted from total accounting profit what is left is economic profit (or economic loss).

   accounting profit-In the accounting sense of the term, net profit (before tax) is the sales of the firm less costs such as wages, rent, fuel, raw materials, interest on loans and depreciation. Costs such as depreciation, amortization, and overhead are ambiguous. Revenue may also be ambiguous when different products are sold as a package, or “bundled.” Within US business, the preferred term for profit tends to be the more ambiguous income.[2]

2. John D, on November 6th, 2008 at 3:28 am Said:

   simply put, accounting costs are the total money costs to do business.

   Economic costs are an addition to accounting costs. They primarily include opportunity costs. The opportunity cost is the cost of the next best alternative use of your money.

   For example: if you made a $100 profit on the books(accounting) but you could have made $50 profit if you invested that same amount of money in savings (economic cost),
   then your economic profit will be $50
   (100-50=50)

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