Question

Explain in detail the difference between the way the accountants calculate business profits and the way the economists do.

Answer 1

Accountants calculate business profit which is called accounting profit, where as economists calculate business profit which is called economic profit.

Followings are some differences between accounting profit and economic profit:

• Accounting profit is the difference between the total revenue and the total cost, excluding the opportunity costs. On the other hand, economic cost is the difference between the total revenue and the total cost, including the opportunity costs. Opportunity costs are the cost of owner's factors of production used in the business for which nothing is paid.
• Accounting profit = Total revenue - Explicit costs  

           Economic profit = Total revenue - Explicit costs - Implicit costs

Some of the example of Explicit costs are:

• Labor costs, i.e., wages
• Raw materials costs
• Transportation costs
• Sales and marketing costs
• Production costs and overheads, etc.

Some of the example of Implicit costs are:

• Company owned buildings
• Self-employment resources
• Owner's money invested in business, etc.

• Economic profit will always be less than the accounting profits.