Economic Profit vs. Accounting Prof🍃it♚: An Overview

Profit is one of the most widely watched financial metrics in evaluating the financial health of a company. It is the financial gain or revenue generated from any business or investment activity in excess of any expenses, taxes, and any other costs. However, economic profits and accounting profits are two types of profits. Economic profit refers to total 澳洲幸运5开奖号码历史查询:revenꦦue from sales minus opportunity c🐭osts from all inputs. Accounting profit, on the other hand, represents the total earnings of a companᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚy, which includes explicit costs.

Economic Profit

澳洲幸运5开奖号码历史查询:Economic profit is a form of profit that is derived from producing goods and services while factoring in the alternative uses of a company's resources. It deducts explicit costs from revenue and includes the 澳洲幸运5开奖号码历史查询:opportunity costs incurred during that period of time. 澳洲幸运5开奖号码历史查询:Implicit costs, which are typically the costs of a compa🍌ny's resources, are also part of the equation.

You can calculate economic profit as long as you know the total amoun𝓀t of revenℱue earned and the total cost involved using the following formula:

Economic Profit = Total Revenue - (Total Explicit Costs + Total Implicit Costs)

For example, the implicit costs could be the 澳洲幸运5开奖号码历史查询:market price a company could sell a natural resource for versus using that resource. A paper company owns a forest of trees. They cut down t𝄹rees and create paper products. Their implicit costs are the timber, which they could sell for marke♌t prices.

Here's another way to think about it. A company may choose Project A over Project B. The profit from Project A after deducting expenses and costs would be the accounting profit. The economic profit would include the opportunity cost of choosing Project A versus Project B. In other words; the economic profit would consider how much more or less profit would have been generated (by using the company's resources) had management chosen Project B.   

Accounting Profit

Accounting profit is also known as a company's earned profit, net income, or 澳洲幸运5开奖号码历史查询:bottom line. Unlike economic profit, accounting profit is reported on a company's income statement. It's the profit earned after various costs and expenses are subtracted from total revenue or total sales, as stipulated by 澳洲幸运5开奖号码历史查询:♑generally accepted accounting principles (GAAP). Those costs include:

• Labor costs, such as wages and salaries
• Any inventory needed for production
• 澳洲幸运5开奖号码历史查询:Raw materials
• Transportation and storage costs
• Production costs and overhead
• Sales and marketing costs
  

Accounting profit is the amount of money left over after deducting the 澳洲幸运5开奖号码历史查询:explicit costs of running the business. Explicit costs are merely the specific amounts that a company pays for those costs in that period—for example, wages. Typically, accounting profit or net income is reported on a quarterly and annual basis and is used to measure the 澳洲幸运5开奖号码历史查询:financial performance of a company.

Key Differences

Economic profit is more of a theoretical calculation based on alternative actions that could have been taken. Accounting profit, on 𓆉the other hand, calculates what actually occurred and the measurable results for the period.

Here's another way to think about it. Accounting profit is the profit after subtracting explicit costs (such as wages and rents). Economic profit includes explicit costs as well as implicit costs (what the company gives up to pursue a certain path). As such, accounting profit represents a company's true 澳洲幸运5开奖号码历史查询:profitability while eco♌nomic profit is indicative of its efficiency.

Companies are only required to report one form of profit to the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) for tax purposes: accounting profit. Economic profit is generally only meant for internal uses. For instance, businesses can use it to determine whether to enter or stay in a particular market. Economic profit also shows how efficiently companies are operating, including whether they're allocating their resources to the best of their ability.

Economic Profit vs. Accounting Profit Example

Let's use a hypothetical example to show how economic and accounting principles work in the corporate world. Remember that economic profit is based on estimates and assumptions while accounting profit is the figure that companies report for tax purposes and to investors.

Accounting profits are easy to determine since we already know that this figure can be found on a company's income statement. As noted above, it is reported as a company's net income. For instance, NVIDIA (NVDA) reported total 澳洲幸运5开奖号码历史查询:net income or accounting profit of $9,75 billion for the 2022 澳洲幸运5开奖号码历史查询:fiscal year compared to the $4.33 billion it earned in 2021.

Now let's take a look at an example of economic profit. Unlike accounting profit, you can't get this figure from a corporate financial or 澳洲幸运5开奖号码历史查询:income statement. Instead, it requires some calculation. Let's say a company earns revenue of $10,000 on sales of stuffed animals. Explicit costs amount to $5,000. In addition, the company could have produced a different product; by foregoing that opportunity, it declined $2,000 of income. U♍sing the formula above, we can determine that the economic profit of producing these toys is $3,000 ($10,000 - $5,000 - $2,000). The $2,000 is included as an implicit cost that is otherwise not recorded on the financial statements.

The Bottom Line

There are a few ways to calculate profit. Most analysts use accounting profit which reflects the revenue less expenses of a company based on accounting rules. These costs are often explicitly defined. On the other hand, economi⛦c profit incorporates imp𝕴licit costs that sometimes not recorded on a general ledger but still impact the net profitability of a decision.