Economic profit

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Most people focus on accounting profit because it's straightforward, measuring revenue against explicit costs for financial reporting. Economic profit, however, considers both explicit and opportunity costs, offering a deeper insight into a business's efficiency and resource allocation. While accounting profit shows a firm's actual profitability, economic profit is a theoretical tool for internal decision-making, helping to evaluate potential ventures.

VISHNU

VISHNU (Querist)
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29 January 2023 Why most people consider accounting profit and not economic profit. And from our childhood itself we learn about accounting profit only. Why so?

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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29 January 2023 Accounting profit is straightforward and precise: revenue minus explicit costs. It measures actual money inflows versus money outflows and is part of the required financial reporting and transparency of a company.
Economic profit is the financial amount that remains after subtracting both explicit costs and opportunity costs from revenue. Opportunity costs are the profits that a business misses out on when choosing to pursue one business venture over another.
Economic profit is used for internal analysis and is not required for transparent disclosure.
While theoretical, economic profit computations can help a company size up and choose between potential business ventures.

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VISHNU

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29 January 2023 sir does it mean that in our day to day life we are actually using accounting profit and ignores economic profit or loss

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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29 January 2023 Yes. For any single business accounting profit is correct measure; and hence used often.

VISHNU

VISHNU (Querist)
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29 January 2023 sir why have u said that Economic profit is used for internal analysis and is not required for transparent disclosure. what does that mean.

VISHNU

VISHNU (Querist)
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29 January 2023 sir one more doubt do we need to consider whether each and every transaction provide us economic profit or loss or to consider our decision in entirety

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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29 January 2023 Economic Profit involves subtracting both Implicit costs and Explicit costs from the Total Revenue. Implicit costs are the opportunity costs that are not measurable and not seen in the books of accounts.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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29 January 2023 Accounting profit is practical from financial perspective, it reflects profitability of the firm while economic profit may not give precise picture as certain aspects are estimated, but it highlights efficiency of the firm in resource allocations.
For more analysis refer : https://quizlet.com/38003114/micro-profit-quiz-flash-cards/

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