Question

Is Accounting profit smaller than Economic profit? If yes, why? If not, why not ? Define Accounting profit and economic profit.

Answer 1

Accounting profit is always greater than economic profit.

Accounting profit = Revenue - Explicit cost ( explicit cost that we can see and eaily measure in monetary value like cost of good sold, operational expense, depriciation, interest expenses, sales & ditribution expenses etc.)

Economic profit = Revenue - Explicit cost - Opportunity cost ( the next best alternative foregone for this business activity)

For example, instead of using a building as office, same can be given to other agency on rent and can have rent income. This rent is not accounted for accoounting profit, but to be considered in economic profit. Hence, economic profit < accounting profit.

-------------------------------------

Hope this will solve yur question. Get back for any question..........All the best