Answer #1

Most of us already know that the sum of money that one receives after the business expenses have been subtracted is what is called the profit. However, very few know that profit exists in two forms, namely economic profit and accounting profit. Accounting profit refers to the value that is attained after subtracting total revenues from the overall cost, while excluding the expense of that opportunity. In contrast, economic profit refers to the value attained from subtracting total revenues and total cost, but including the expense of that opportunity.

A firm is termed as having accounting profits when the revenue is more that the accounting costs of that firm. In short, accounting profit may be considered as the cost that a company attains after all economic costs have been met. In comparison, economic profits are obtained only if the revenue is more than the expense of that opportunity. A huge difference that is normally visible between these two is the fact that economic profits are always lesser in comparison to an accounting profit.

When calculating an accounting profit, several things are going to be considered. They include the leased assets, allowances, provisions and depreciations as well as capitalizing the costs of development. In contrast, economic profits also demand the consideration of various things before calculation. These include the residual value, tax rates, interest rates and inflation level as well as opportunity costs.

When contrasted to an economic profit, accounting profit may be calculated specifically for a set time period. In this regard, accounting profits are only calculated in leap years. Additionally, the revenue subtracted from explicit expenses is considered like the total accounting profit, whilst the revenue subtracted from both implicit and explicit expenses is said to be the overall economic profit. Finally, economic profits are constantly higher as compared to any accounting profit.

Answered By: daniel [554 ]