Differentiate Accounting Profit and Economic Profit.

Accounting profit refers to the profits reported in income statement.

Whereas Economic profit refers to the net cash in-flows generated through operations. It refelects real capacity of the company to generate cash in-flows. It results in increase in firm's value and increase in market price of share.

Accounting profit =Total revenue (sales) minus dollar cost of producing goods or services.

Economic profit = Total revenue minus total opportunity cost

Accounting profit figures consider realized or actual financial gains and losses. Accounting profit is the total of all the company's revenue minus cash payments for all explicit company costs and purchased resources. These resources include raw materials, materials transport, staff wages and benefits, rent paid on company property and interest on capital.

Unlike accounting profit, economic profit considers the cost of an organization's in-house resources that are utilized in their production of their goods or services. These items are also referred to in finance as implicit resources. Implicit or self-owned resources can include company-owned property, equipment, self-employment resources, company-owned vehicles and independently conducted staff training initiatives.

Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs.

explicit cost

A direct payment made to others in the course of running a business, such as wages, rent, and materials, as opposed to implicit costs, which are those where no actual payment is made.

implicit cost

The opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires.

Economic profit

Total revenue minus total cost, including both explicit and

implicit costs

Accounting profit

Total revenue minus total explicit cost