Write the difference between accounting profit and economic profit.

Banking & FinanceManagementCompanies/Organisations

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)

raja
Published on 25-Jul-2020 07:10:52
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