Question

Distinguish between accounting view and economic view of profit

Answer 1

 

How do economic profit and accounting profit differ?

By Chris B. Murphy | Updated July 24, 2018 — 1:08 PM EDT

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A:
Profit is one of the most widely watched financial metrics in evaluating the financial health of a company. Accounting profit and economic profit share similarities, but there are distinct differences between the two metrics.

Accounting Profit

Accounting profit is also known as the net income for a company or the bottom line. It's the profit after various costs and expenses are subtracted from total revenue or total sales as stipulated by generally accepted accounting principles (GAAP). Those costs include:

Labor costs such as wages

Inventory needed for production

Raw materials

Transportation costs

Sales and marketing costs

Production costs and overhead

Accounting profit is the amount of money left over after deducting the explicit costs of running the business. Explicit costs are merely the specific amounts that a company pays for those costs in that period – for example, wages. Typically, accounting profit or net income is reported on a quarterly and annual basis and is used to measure the financial performance of a company.

Economic Profit

Economic profit is similar to accounting profit in that it deducts explicit costs from revenue. However, economic profit also includes the opportunity costs for taking one action versus another in the period. Economic profit is determined by economic principles, not by accounting principles.  
Economic profit also uses implicit costs, which are typically the costs of a company's resources. Examples of implicit costs include:

Company-owned buildings

Plant and equipment

Self-employment resources

Economic profit is the profit from producing goods and services while factoring in the alternative uses of a company's resources.