The Difference between Economic Profit and Accounting Profit
The Difference between Economic Profit and Accounting Profit
When it comes to business decisions, there are many ways to analysis the financial status of a firm. What guidelines determine profit margin? Who uses these guidelines? How is profit used to analysis a firm and its business decisions? This paper will discuss two terms that are used to define profit: accounting profit and economic profit. The first term is called accounting profit which uses the equa-tion.
The second term for profit is economic profit. Economic profit adds another element to the equation when determining profit. It is as follows.
Both Economic and accounting profit have their place in analysis of a firm’s business activity.
To have a clearer understanding of accounting profit and economic profit, a few terms need to be de-fined. According to the text, Economics Today- the micro view, explicit costs are defined as the ex-penses that business managers must take account of because they must actually be paid out by the firm. (p451, Leroy) The second term from the same text is implicit costs which is defined as expens-es that managers do not have to pay out of pocket. (p451, Leroy)
Both economic and accounting profits have their place in the analysis of the firm’s activities.
“Profitability is a term of economic efficiency. Mathematically, it is relative index- a fraction with profit as the numerator and generating profit flows or assets as denominator.” (3) A closer look at accounting profits shows that it is mainly a mathematical process following firm’s cash flow. The ex-plicit cost are explained as the expenses that a firm must incur when operating. These expenses in-clude cost of raw material, wages, capital investments in machinery and property, office supplies, and other items that must be paid cash for. The reporting of explicit costs is required to finalize the formula for ac-counting profit. Cash flow is determined by revenue generating activities
When it comes to business decisions, there are many ways to analysis the financial status of a firm. What guidelines determine profit margin? Who uses these guidelines? How is profit used to analysis a firm and its business decisions? This paper will discuss two terms that are used to define profit: accounting profit and economic profit. The first term is called accounting profit which uses the equa-tion.
The second term for profit is economic profit. Economic profit adds another element to the equation when determining profit. It is as follows.
Both Economic and accounting profit have their place in analysis of a firm’s business activity.
To have a clearer understanding of accounting profit and economic profit, a few terms need to be de-fined. According to the text, Economics Today- the micro view, explicit costs are defined as the ex-penses that business managers must take account of because they must actually be paid out by the firm. (p451, Leroy) The second term from the same text is implicit costs which is defined as expens-es that managers do not have to pay out of pocket. (p451, Leroy)
Both economic and accounting profits have their place in the analysis of the firm’s activities.
“Profitability is a term of economic efficiency. Mathematically, it is relative index- a fraction with profit as the numerator and generating profit flows or assets as denominator.” (3) A closer look at accounting profits shows that it is mainly a mathematical process following firm’s cash flow. The ex-plicit cost are explained as the expenses that a firm must incur when operating. These expenses in-clude cost of raw material, wages, capital investments in machinery and property, office supplies, and other items that must be paid cash for. The reporting of explicit costs is required to finalize the formula for ac-counting profit. Cash flow is determined by revenue generating activities
Bibliography: Author’s Note: I am missing a connection to quote (3) and will forward it as soon as I track it down electronically. I read several online documents to support this report and lost track of the quotes source. I am very concerned as I centered my report around it. I will find it and forward it as soon as I track it down through my history back search. My sincerest apologies with this incomplete bibliography. Basu,Chirantan, eHow Contrib, How to Calculate Economic Profits, http://www.ehow.com/how_7525818_calculate-economic-profits.html Capozzi, Catherine, Differences between Economic Profit and Accounting Profit, eHow Contributor http://www.ehow.com/info_8085803_differences-economic-profit-accounting-profit.html#ixzz2ibFMyvtV Khanacademy, Economic Profit vs Accounting Profit, http://www.youtube.com/watch?v=06j_zPdPWOY Leroy Miller, Roger, Brenda Abbott, Sam Fefferman, Roland K Kessler, and Terrence Sulyma. Economics Today: The Micro View—5th ed. Toronto, Ontario: Pearson Canada Inc. 2012. Print Wallace, Maxwell and Demand Media , Accounting Profit vs. Economic Profit Assets, online at Chron.com small business.chron.com?accounting-profits-vs-economic-profit-assets-30586.html Whimlot, Petrai, Differences between Economic Profit and Accounting Profit, eHow Contributor, http://www.ehow.com/info_8675841_economic-measure-profit-accounting-profit.html#ixzz2ibR9Z4Gb