The difference between economic profit and accounting profit

Difference between economic profit and accounting profit: different definitions, different values, different measures.

1, the definition of different

Accounting profit, can be understood as the results of business operations. Profit includes the net amount of revenue less expenses, gains and losses that are directly recognized in the current profit. Accounting profit, also known as book profit, is the profit that a company discloses in its income statement.

Economic profit, which can be understood as the difference between total revenues and total costs. Economic profit, can be expressed as the return on capital invested minus the cost of capital, multiplied by the amount of capital.

2, different values

Economic profit is numerically smaller than accounting profit, economic profit = accounting profit - opportunity cost. When the capital invested in the enterprise is greater than zero, the economic profit is always less than the accounting profit.

3, different indicators

Accounting profit as a traditional accounting indicators, the main consideration is the cost of accounting, accounting costs are explicit costs, is the enterprise engaged in an economic activity, that is, the enterprise to purchase or hire the actual expenditure of factors of production, can be found on the accounting books.

Economic profit as a modern corporate enterprise management accounting method indicators, considering the economic cost, economics considers the cost is for the engagement in a certain economic activity of the explicit cost and implicit cost of the sum, is the owner of the enterprise itself to provide the opportunity cost of capital, natural resources and labor, is the enterprise in the operation of the production of a certain product will be used for other purposes of time, assets, money, etc., and the loss of the largest gain.

Characteristics of Economic Profit:

1. Possibility and reasonableness of the existence of economic profit.

2. Economic profit is the necessary compensation for the risk taken by the manufacturer's investment.

3. Higher than normal profits are the reward for successful innovation.

4. Above-normal profits are the result of special skills in good management.

5. Individual manufacturers in certain industries earn higher than normal rates of return over time because they effectively dominate the market.

6. There exists a long-run equilibrium normal rate of profit earned by all manufacturers; however, the profit that may be earned by each individual manufacturer in a specific industry at any given point in time is always above or below this normal level.