Economists say that there is a difference between economic profit and accounting profit. What do you think
Economists say that there is a difference between economic profit and accounting profit. What do you think that difference is? Begin by defining the concept of opportunity cost.
Opportunity cost refers to value of a factor in its next best alternative use. In other words, Opportunity cost of a commodity is the amount of other good which has been given up (next best alternative sacrificed) in order to produce that commodity.
For example, A teacher is getting $ 5000 per month as salary from the school. If he leaves the school job and starts tution work, he is expected to earn $ 4000 per month. The opportunity cost of school job is $ 4000 per month that the teacher could have earned in the next best alternative use, that is doing tution work.
Difference between economic profit and accounting profit :-
|Economic profit||Accounting profit|
|1). Economic profit is the difference between total revenue and total costs. Both explicit costs as well as implicit costs are included in the total costs. (Implicit cost are the opportunity cost.)||1). Accounting profit is the difference between total revenue and total costs. However, only explicit cost i.e., actual monetary costs incurred are included in the meaning of total costs. Opportunity costs areexcluded from the total costs while arriving at the accounting profits.|
|2). Economic profit = Total revenue – Total costs (Explicit costs and Implicit cost).||2). Accounting profit = Total revenue – Total explicitcosts.|
Note:- Economic profit is lesser than the accounting profit because opportunity costs / implicit costs are subtracted in calculation of economic profits, however, only explicit costs are considered in calculation of accounting profit i.e., implicit cost are not subtracted in calculation of accounting profits.