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.