The Difference between Economic Profit and Accounting Profit

994 Words Oct 17th, 2013 4 Pages
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
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The guidelines for the accounting profit follow an equation that recognizes profit = reve-nue minus explicit costs as a mathematical formula for cash flow management. The guideline for economic profit add the implicit costs to the equation so that non cash flow concerns can be consid-ered. With the equation, economic profit = revenue minus explicit costs and implicit costs, there is an external influence of potential revenue generating activities that represent the implicit costs (oppor-tunity costs.) The main difference between accounting profit and economic profit is the use of im-plicit costs in the economic profit equation. The ability to step back from a business and consider the impact of other activities will give a better review of whether to continue the firm’s activity or not when examining the profits of a firm.

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
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