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Economic profit & accounting profit:
Economists measure a firm's economic profit: Economic cost=total revenue-explicit cost-implicit cost. accounting profit= total revenue- explicit cost. Economic profit is smaller than accounting profit
Accountants measure the accounting profit.: Accounting profit involves non cash transactions/adjustments for depreciation, allowances, provisions etc. and application of relevant accounting standards such as capitalising development costs, leased assets etc. And importantly accounting profit is calculated for a period of time. It is calculated for whole of the entities business.
Where as, Economic Profit is calculated from the perspective of economist over long run. It means the profit in real terms. It is normally calculated for the purpose of project appraisal. This includes calculating and matching the projects Cash Inflows with Cash Outflows at its present value by discounting them at the companies required cost of capital. This task requires consideration and inclusion of both financial and non-financial risk factors that affects the profits. Relevant adjustments to the above cash flows are required. For example, it considers opportunity costs, residual value, changing working capital requirements, changes in inflation level, tax rates, interest rates etc. on the cash flows over the period of the project. Obviously, this project life can be broken down into annual projections parallel to the accounting year.
In the context of general management accounting, the difference between accounting profit and economic profit is simply that economic profit takes into account opportunity cost (the cash flows we gave up by choosing to devote scarce resources to one project rather than another). The basis for the notion of opportunity cost is that, since we don't have unlimited resources to invest, we are not able to invest in every single opportunity for profit, and so we must choose which projects we will invest in. And since we don't have to resources to undertake every profitable project, we also have to choose to reject some opportunities that would also be profitable. But when we reject one opportunity in favour of another, we also give up any return we would have gotten by accepting the opportunity. That profit we give up is the opportunity cost of not accepting that opportunity. Economic Profit equals Accounting Profit less Opportunity Cost
the deference is ..the the economic firm;'s profit is the net present value of it's earning over it's life time
where as the accounting firm'sprofit is based on acrual accounting, the measurement of resources generated and consumed according follow the rule set by GAAP .
Economic Profit:
Profit in economics can be defind as reward for enterprises for risk taking or uncertainity bearing.
Accounting Profit
The increase in wealth over an accounting period between the begning and end of economic profit.
Profit (P)=Total Revenue (TC) - Total Cost (TC)
Economic profit is the realizable gain/loss of goods/asset based on its fair market value while accounting profit it is the actual profit/loss for the sale of goods or asset.
The defferences between the real profit and accounting profit is that accouting profit is arrived at as a results of many accounting principles and policies which sometimes do not involves actual movement of money i.e. accounting provisions.
A company's total earnings, calculated according to Generally Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business, such as depreciation, interest and taxes.
A. economic concept: This means the amount of change in the net value of the economic unit within a certain time.
B - accounting concept: The mean difference between the income generated by economic unity during a certain time period and the expenses incurred by the unit during this period to achieve this income..
Accounting profit is Total Income less Total expenses, where as Economic profit is opportunity cost deducted from accounting profit.
Economic profit
Total revenue minus total cost, including both explicit and
implicit costs
Accounting profit
Total revenue minus total explicit cost
