Write the difference between accounting profit and economic profit.

The major differences between accounting profit and economic profit are as follows −

Accounting profit

• It gives true financial health of a company.

• It tells about profitability of the company.

• No special terms are needed here.

• It is more practical than economic profit.

• It’s a short term phenomenon.

• It is determined by GAAP.

• It is used for income tax and financial performance.

• It has single entity/accounting period view.

• The formula to calculate accounting profit is as follows &minus accounting profit = total revenue – expenses

Economic profit

• It doesn’t give true financial health of a company.

• It tells about effective allocation of resources.

• It includes special terms such as residual value, inflation level changes etc.

• It has less practical approach than accounting profit.

• It is a long term phenomenon.

• It is determined by economic principles.

• It is used to determine market entry/stay/exist.

• It has Marco market/whole project time line view.

• The formula to calculate economic profit is as follows − economic profit = opportunity cost – implicit costs (economic profit is surplus)