10 DIFFERENCE BETWEEN ACCOUNTING PROFIT AND ECONOMIC PROFIT

Profit is the difference between the revenue earned from the sales of goods and services and the expenses incurred in generating the revenue.

It can also be defined as the income remaining after all expenses are paid.

Profit may be divided into two, namely; economic profit and accounting profit.

Accounting profit can be defined as the total income of a firm after all explicit costs have been deducted.

It is calculated as the total revenue of a business minus the total monetary cost of the business.

On the other hand, economic profit can be defined as the total income of a firm after all explicit costs and implicit costs have been deducted.

It is calculated as total revenue, minus implicit cost minus explicit costs.

Difference Between Economic Profit and Accounting Profit

1. Accounting profit is the total revenue less any direct payments to third parties made in the course of operating the business, such as salaries, rent, and materials.

Economic profit, on the other hand, is the difference between total revenue, less all direct payments made to third parties in the course of running the business, minus the opportunity cost of what a firm forgoes to use its factor of production to produce revenue.

2. Accounting profit is used to prepare the balance sheet and is reported on the income statement.

This contrast with economic profit, which is neither used to create the balance sheet nor is recorded in the income statement.

3. While economic profit is often referred to as supernormal profit or abnormal profit, accounting profit is also known as net income or bookkeeping profit.

4.  Economic profit is used to determine market stay, exit, or entry while accounting profit is used for income tax and financial performance purposes.

5. Accounting profits typically last a year, whereas economic profits could last longer than that.

6. As opposed to Economic profit, which is calculated using economic principles, Accounting profit is calculated using Generally Accepted Accounting Principles (GAAP).

7. Accounting profit reflects a company's financial profitability, whereas economic profit reflects how effectively it allocates its factors of production.

8. Because accounting profit only takes explicit costs into account, it is typically higher than economic profit.

On the other hand, because economic profit takes both explicit cost and implicit cost into account, it is lower than accounting profit.

9. Accounting profit, which is based on actual monetary costs, is more practical than economic profit.

On the other hand, because it is based on assumptions about the opportunity cost of employing the company's factor of production, economic profit is less practical than accounting profit

10. While economic profit is the difference between total revenue and economic cost, accounting profit is the difference between total revenue and accounting cost.

READ ALSO: DIFFERENCE BETWEEN REVENUE AND PROFIT

Tabular Comparisons Of Accounting Profit and Economics Profit

Features    Accounting profitEconomic profit
Calculated as Revenue minus explicit costsRevenue minus explicit costs minus implicit costs
Used forMeasuring financial performanceDetermining market entry, stay or exit
Measured using 

Generally Accepted Accounting PrinciplesEconomic principles
Considers opportunity cost?NoYes
Recorded in the income statement?YesNo
Also called Net incomeSupernormal or abnormal profit
Mainly used byAccountantsEconomist
PracticalityQuite practicalQuite impractical

Let's use the example of a water factory to explain the difference between accounting profit and economic profit.

The total revenue (the price of a bag of water multiplied by the quantity of bags of clean water sold) and less financial expenses like the cost of operating the factory, the cost of purchasing the factory, etc., will be the factory's accounting profit.

However, the money that would have been generated if the factory had been employed to produce something other than water will be deducted from the accounting profit of the factory to get the economic profit of the factory.

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