Question

What is the difference between "accounting profit" and "economic profit?" Which one is more important for determining whether to operate or close down a business that you own?

Answer 1

Accounting Profit is precisely the practise of accounting applied on to the operational financials to determine the profitability of the same; This shall determine the Gross Margin, EBITDA and Net income of a firm or an operation;

However, the Economic Profit is more elaborate and it is similar to accounting profit with a further addition of the explicit and implicit costs - opportunity costs etc. This is more comprehensive interms of application of other associated impact of the operations.

While accounting profit is a general application, economic profit is considered and is applied when there is a situation of analysis or determination of the feasibility of any new project or operation or expansion. This shall provide the wider aspect of the implications of the new project on the existing project / operations etc. Hence, the economic profit is considered as important in determining the feasibility study to determine whether to operate or close down a business.