Question

Explain the difference between accounting and economic profit. What does zero economic profit mean

Answer 1

Economic profit parallels accounting income in that it deducts specific sales costs. But economic benefit often involves the expense of taking one action in the time over another. The economic profit is determined by economic principles, not by the principles of accounting. Economic benefit uses implied costs, which are usually the capital costs of a business. Economic benefit is the income of the production of goods and services, thus factoring in the alternative uses of the capital of a business. The implied costs , for example, could be the market price a company could sell a natural resource versus using that resource

Accounting profit is also known as a company's net income, or the bottom line. It is income, as stipulated by commonly accepted accounting principles ( GAAP), after specific costs and expenses are subtracted from overall revenue or total sales. Economic gain is more of a theoretical calculation based on possible alternative actions. Accounting profit, by contrast, calculates what actually happened and the measurable results for the period. Another way of thinking about it is that accounting profit is profit after explicit costs (such as wages and rents) have been subtracted. Economic gain includes both explicit costs and implicit costs

Profit instantly conjures up the concept of income accounting which is Total Revenue - Total Explicit Costs. But economic profit takes both the Implicit costs and the explicit costs into account. Zero Economic Profit involves the benefit of using finite resources, taking risks, etc. paid to the entrepreneur, and total expense is equivalent to total revenue.