What is the difference between accounting profit and economic profit?

1 Answer | Add Yours

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The difference between these two kinds of profits is that economic profit takes into account both implicit and explicit costs while accounting profit takes into account only explicit costs.  Economic profit includes the opportunity costs of running a business while accounting profit does not.

With regard to this issue, there are two kinds of costs.  First, there are explicit costs.  These are the things that we usually think of as costs.  They are payments that are made by a firm to people other than the owners of the firm.  So, the wages that workers are paid are part of explicit costs.  So is the cost of the materials that you buy to make your product.  So is the electric bill for your office.  Second, there are implicit costs.  These are the opportunity costs of using the firm’s resources.  For example, if you own a building and you use it as your office, you are giving up the potential of renting that building out to someone else.  The rent that you forego in order to use the building yourself is an implicit cost.

Accounting profit simply takes total explicit costs and subtracts them from total revenue.  Economic profit, by contrast, subtracts both explicit and implicit costs from total revenue.  It is possible to make zero economic profit (this is called a “normal profit”) while still making positive accounting profit.

We’ve answered 318,912 questions. We can answer yours, too.

Ask a question