Difference Between Accounting and Economic Profit

What is Accounting Profit?

We can say that accounting is the process of keeping all types of financial records of an organization or business. Similarly, profit means financial gain that is earned after selling a product and making different strategies.

Accounting profit is like a system that is responsible for recording and summarizing business and financial types of profits and then analyzing and verifying them.

 Accounting profit is the most important in an organization it is the process that helps analyze all type of amount that is either gained or worked in favor of an organization.

 We can say the “word accounting” means all types of profit that happened in the accounts of the business. Accounting profit had always played a major role in business.

 Accounting profits help keep records in an organization of all types of profit and therefore it helps an organization. Every business and organization needs an accounting process to balance financial activities.

 It plays a vital role in business it helps to keep track of profit to provide investors or the government with durable and quantitative financial information.

What is Economic Profit?

Economics is known as the social science that is responsible for all types of study of consumption and production of resources. Profit is known as a financial gain that is earned after selling a product or making favorable decisions.

 In this way, we can say that the meaning of economic profit is the difference between the total share generated by a business and the total cost used by the organization.

 Economic profit is the total profit or benefit that is obtained between two projects for example if a company sale a particular product we say it’s called (project A) the strategy used for it and the profit obtained from it are analyzed.

Then after analyzing the profit gained from project (A) several changes are made for (project B) in order to obtain a new strategy that works more profitable than project (A)

 The difference that is calculated between projects A and B will be defined as the term economic profit. There is a specific formula to calculate economic profit that is that the accounting cost and the opportunity cost is calculated by deducting them from the total cost.

 Economic profit is really important in terms of business it helps an organization to come up with better plans and strategies from their experience and do every single effort to obtain the most profit they can.

Difference Between Accounting and Economic Profit

Accounting profit only targets your explicit cost which included payroll and rent. Economic profit targets on both explicit and implicit cost which includes total cost suspended on projects.

 Accounting profit helps in calculating the total profit of a business. Economy profit helps in the calculations of profit that can be obtained from using different method and strategy in a business.

Accounting profits should always be reported to investors or tax collection services. Economic profit is not reported to anyone it is only calculated for company benefit.

 Accounting profit is the total profit obtained in a year by a business. Economic profit is the profit that is obtained after the deduction is made if the total cost from the total income.

Comparison Between Accounting and Economic Profit

Parameter of ComparisonAccountingEconomics
MeaningThe process of recording and summarizing businessThe difference between the total share and total cost
PurposeAnalyzing the financial positionMaking profitable decisions
Considered by It is considered by accountantsIt is considered by economists  
TargetsIt targets explicit costIt targets both explicit and implicit cost
Reported toReported to Investors, tax collection servicesNot reported to anyone