What is the difference between economic and accounting profit? Why is a distinction between them important?

Expert Solution

Answer: Difference between accounting profit vs Economic profit as follows :

Accounting profit is the difference between total revenue minus total cost whereas economic profit is calculated from total revenue minus total cost - opportunity cost.
Economic profit is always less than the accounting profit.
Accounting profit does not deduct implicit cost from the revenue where the economic profit does deduct both explicit as well as implicit cost.
Accounting profit is determined by the gap whereas the economic profit is determined by the economic principle.
Accounting profit is used to determine for income tax purpose where economic profit is used to determine the entry or exist from the market.

The distinction between them is important because accounting profit helps in determining the financial health of the business. It is used for the purpose of filing income tax return and financial performance of the business.where as Economic profit helps in the macro level of determine the entry or exist from the market.

Rahul Sunny answered 2 years ago

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