You can learn more about the standards we follow in producing accurate, unbiased content in our. For instance, businesses can use it to determine whether to enter or stay in a particular market. You could say that it represents the efficiency of the company, while accounting profit represents the actual profitability. Instead of the painting business, Ava could have operated a home cleaning service and spent the same $100 each day on workers and machines. Clifford produces 20 shoes at a cost of $200 and sells all 20 shoes for a total of $300. The main difference between economic profit and accounting profit is that economic profit calculation subtracts opportunity costs from total revenue, whereas accounting profit subtracts explicit costs only. In this article, we will introduce you to two forms of profit, profit calculations, and explain the differences between accounting vs economic profit. Now that you have an idea of what both accounting and economic profits are, lets delve into the key differences between these two metrics. If the opportunity cost is more than the accounting profit, this indicates that the invested money could have been put to better use. Your accounting profit means how much net income your company makes. Economic profit includes the opportunity costs associated with production and is therefore lower than accounting profit. Learn more in CFIs Financial Analysis Course. Since opportunity cost cannot be negative, economic profit will be lower than accounting profit. Free and expert-verified textbook solutions. For example, a quickly growing company might include growth-oriented costs such as stock compensation expenses. Those costs include: Accounting profit is the amount of money left over after deducting the explicit costsof running the business. Now, let's look at an example involving both economic profit and accounting profit. Now, if you wanted to change the amount of money weve calculated to include opportunity costs, added expenses, one-time payments, or simply focus on cash flow, you might want to examine other forms of profit instead. Profit, which is typically called net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs. Common types of expenses include the cost of goods sold (COGS), marketing and advertising expenses, salaries and benefits, travel, entertainment, sales commissions, rent, depreciation and amortization, interest, and taxes. However, economists use the term "profit" differently from the way accountants use it. Knowing the differences when bookkeeping will allow you to determine your companys actual profit, find possible ways you can increase profit, and make educated business decisions. Due to the differences in the costs accounted for in economic profit and accounting profit, economic profit usually tends to be lower than accounting profit. In this video, explore the difference between a firm's accounting and economic profit. You must keep accurate records of these to establish the true profit of your company.Total revenue is made up of things like: To calculate your accounting profit expenses, you will need to focus on the explicit costs of your company. The economic profit would includethe opportunitycost of choosing Project A versus Project B. Your email address will not be published. Economic profit is the profit from producing goods and services while factoring in the alternative uses of a company's resources. Both profit types require a company to determine its revenue before performing calculations. Since the purpose of accounting is to be as strict as possible, the accounting profit must be based on exact numbers. Accounting profits are determined using GAAP, looking at your actual revenue and explicit costs. Whereas, economic profit is the surplus after deducting the opportunity cost and implicit cost as well. Dan keuntungan ekonomi meningkat. Unlike economic profit, accounting profit is reported on a company's income statement. Well, aside from the obvious, which is that accounting profit is used by accountants whereas economic profit is used by economists, accounting profit only looks at explicit cost, whereas economic profit looks at both explicit cost and implicit cost. To calculate economic profit, youll want to use the economic profit formula: Economic Profit = Total Revenue (Total Explicit Costs + Total Implicit Costs). Will you pass the quiz? It deducts explicit costs from revenue and includes the opportunity costs incurred during that period of time. By using our website, you agree to our use of cookies (, Difference Between Accounting Profit and Economic Profit, Accounting Profitvs. Economic Profit Infographics, Accounting Profit vs. Economic Profit Video. Conclusion The whole future of the company depends on its profit earning capacity. Accounting profit is what many people tend to think of when they think profit, but an economist would say that you leave something very important out when you do so: opportunity costs. On the other hand, total revenue refers to the quantity of products sold by the firm multiplied by the price per unit of product. You are free to use this image on your website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Accounting Profit vs Economic Profit (wallstreetmojo.com). As you can see, since Ava's accounting profit does not include the extra revenue Ava could have generated from running a house cleaning service instead of a painting business, her accounting profit is higher than her economic profit. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. TR-TC= 0. if NEGATIVE. Accounting profit refers to total revenue minus explicit costs. Accounting profit includes explicit costs while economic profit includes explicit and implicit costs (the opportunity costs). . Perfect Competition . On the other hand, economic profit considers your explicit and implicit costs, including the cost of idle resources you could put to better use. Why or why not? This figure will be printed on the financial statements you receive from your accountant. Classical economists have taken it as the sole objective of the firm. The Securities and Exchange Commission (SEC) requires that companies report their accounting profit. Some business owners may confuse accounting profit with several other forms of profit, including pro forma income and cash flow. Let's use a hypothetical example to show how economic and accounting principles work in the corporate world. Instead, it requires some calculation. Lets say youve just given up your job to start up a new beauty salon. A firm aims to earn positive economic profits. Whilst accounting profit subtracts explicit costs such as rent, utilities, and wages from revenue - economic profit also subtracts implicit costs which are the opportunity costs to the firm from choosing Option A over Option B. E.g., Mrs. B is running a pastry shop and must maintain track of their earnings. Let's see how this happens. Or an insurance company may add back catastrophic losses. Accounting profit is a company's net income, which is the total revenue minus any actual expenses or costs. This is because opportunity cost includes everything the firm has to forgo to produce goods. Accounting profit vs economic profit. Structured Query Language (SQL) is a specialized programming language designed for interacting with a database. Excel Fundamentals - Formulas for Finance, Certified Banking & Credit Analyst (CBCA), Business Intelligence & Data Analyst (BIDA), Commercial Real Estate Finance Specialization, Environmental, Social & Governance Specialization, Financial Planning & Wealth Management Professional (FPWM). You would have made $60,000 if you had kept working at your job. Type of costs Accounting profit is determined only using explicit costs. The economic profit is defined as the profit that the business derives over and above the opportunity costs. Cookies help us provide, protect and improve our products and services. A paper company owns a forest of trees. Economic profit refers to total revenue minus total explicit costs and minus total implicit costs. Accounting profit simply looks at how much is spent and how much you gain back, whereas economic profit looks at everything you lost and everything you gained. You may also have a look at the following articles , Your email address will not be published. Then youll want to figure out your economic profit to increase the efficiency of your business. Though economic profits can involve a lot of assumptions, they can give an approximate answer to the desired direction. For economists, accounting profit and economic profit are closely related but have a few key differences: Formula: Accounting profit and economic profit differ in their formulaswhile accounting profit uses only explicit costs and general revenue, economic profit includes one additional variable: implicit cost. First, we will look at the formula for accounting profit. Economic profit will have to be greater than accounting profit for the concept to exist. Implicit costs do not occur due to the exchange of resources. In this article, we will introduce you to two forms of profit, profit calculations, and explain the differences between accounting vs economic profit. The economic Profit is significantly different from the accounting profit. As a shareholder/investor, the accounting profit is important as that will give the true picture of the financial performance. It can be used to measure the financial health of your company. Required Rate of Return (RRR), also known as Hurdle Rate, is the minimum capital amount or return that an investor expects to receive from an investment. There are different formulas for calculating accounting profit and economic profit. This article has been a guide to Accounting Profit vs. Economic Profit. Whenever a firm rattle on profit, it is usually an accounting profit. Is one method better than the other? These are actual costs of the business that were paid directly to others, such as costs of goods sold, wages, and rent. The main difference between economic profit and accounting profit is that economic profit factors in opportunity cost. Upload unlimited documents and save them online. The economic profit formula is: Economic profit = Total revenue (Implicit costs + Explicit costs) The accounting profit formula is: Accounting profit = Total revenue Explicit costs Related: Costs vs. However, since Kris's business works with paper, he could decide to run a business making toilet paper instead, which pays $120 a day, but uses the same $70. On the other hand accounting profit is the sum of all the company earnings, including explicit costs. Economic profit includes explicit costs as well as implicit costs (what the company gives up to. Use your accounting profit when you want to look at the profitability of your company in that year. Dr. JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. Opportunity cost represents what assets invested in the business could have earned in a different investment. The main relationship between accounting profit and economic profit is that they both include explicit costs in their calculation. Economics, Business, Medicine, Nursing, Education, Technology, Tourism and Travels, Leadership, History, Poverty, Marketing, Climate Change, Social Justice, Chemistry, Mathematics, Literature . Economic and accounting profit provide information about the profitability of a firm. Economic profit is the difference between total monetary revenue and total costs, but total costs include both explicit and implicit costs. Accounting profit is typically confused with economic profit. The profit from Project A after deducting expenses and costs would be the accounting profit. Retained Earnings: What's the Difference? Accounting profits are for short term period . First, youll want to calculate your explicit costs for the year: Selling and administrative expenses: $15,000. These include white papers, government data, original reporting, and interviews with industry experts. By choosing to run a birthday card business, Kris is forgoing the $120 from toilet paper, minus the $100 he actually makes (which gives $20). Accounting profit is the profit generated by the organisation after deducting all relevant costs incurred or accrued during that accounting period from the total revenue. Contribution Margin: What's the Difference? Once the free cash flow is determined, we use theoretical principles rather than GAAP to find the opportunity costs of comparable alternatives. Accounting profit reflects the profitability of a firm whereas economic profit highlights the efficiency of the company in resource allocation. Explicit costs simply refer to the money we give out to acquire a good, whereas implicit costs refer to costs that do not require giving out money. Now that you have an idea of what both accounting and economic profits are, let's delve into the key differences between these two metrics. The first step is to calculate the cash flow of each project. Economic profit is more theoretical than accounting profit. If accounting profits exceed implicit costs, the firm would earn a positive economic profit and should continue the business. Sign up to our newsletter and get updates our blog post and loan specials. In 2011, she became editor of World Tea News, a weekly newsletter for the U.S. tea trade. Some investors will include cash flow numbers when valuing a business. Economic profit, meanwhile, shows the degree of efficiency with which the company is using its resources to generate revenue. However, he currently works as a delivery guy, and this means each hour he works as a delivery guy comes at an implicit cost of $50. Economic profit is similar to accounting profit, but it includes opportunity costs. Economic Profit vs. Accounting Profit: An Overview, Economic Profit vs. Accounting Profit Example, Explicit Cost: Definition, Examples, and How It Works, Economic Profit (or Loss): Definition, Formula, and Example, Earnings after deducting explicit and implicit costs from total revenue, Earnings after deducting explicit costs of running a business, Reported on corporate income statements and to the IRS. This includes the opportunity costs of if you would do something, rather than what you actually did. We generally look at profits from accounting perspective. Explicit costs are merely the specific amounts that a company pays for those costs in that periodfor example, wages. You can calculate economic profit as long as you know the total amount of revenue earned and the total cost involved using the following formula: For example, the implicit costs could be the market price a company could sell a natural resource for versus using that resource. Accounting profit is the difference between total revenue and the direct costs the company is incurring. It is the accounting profit minus the opportunity cost of doing something else. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. A paper company owns a forest of trees. If the total revenue is $300,000 and the explicit costs are $50,000 then accounting profit will be $300,000 - $50,000 = $250,000. Learn more in CFIs Free Accounting Crash Course. Akuntansi vs Laba Ekonomi. It involves deducting explicit and implicit costs from the total revenues generated for a period. Accounting profit is also not the same as cash flow. It is used solely as a way to determine opportunity costs in various theoretical scenarios and alternative actions. In contrast, economic profit uses both explicit and implicit costs of the company. This is because they show how a business is actually doing day-to-day since cash is a good indicator of what the companys financial position actually is. Everything you need for your studies in one place. So, what are the differences between economic profit and accounting profit? You must keep accurate records of these to establish the true profit of your company. It is primarily used by a company when deciding when to enter or exit a market. Accounting profits are easy to determine since we already know that this figure can be found on a company's income statement. Cost of goods sold (COGS), which includes expenses like the cost of raw materials and parts, production costs, direct labor costs, supplies used, overhead costs, shipping or freight costs. refers to total revenue minus explicit cost. It is calculated by taking a look at what actually happened and examining the measurable results that took place. Kris is a trained video editor who can work as a video editor for $50 per hour. The main difference between economic profit and accounting profit is that economic profit looks at opportunity cost, whereas accounting profit looks at explicit cost and depreciation. You will want to know the total revenue of your company, as well as the total explicit and implicit costs. Normal profit equals zero accounting profit. Economic profit is generally only meant for internal uses. Total cost refers to all costs the firm incurs to employ inputs, Total revenue refers to the price per product multiplied by the quantity of the product sold, An explicit cost refers to an outlay of money. Economic profit (or loss) is the difference between the revenue received from the sale of an output and the costs of all inputs, including opportunity costs. Economic profit isa form of profit that is derived from producing goods and services whilefactoring in the alternativeuses of a company's resources. As noted above, it is reported as a company's net income. What is the difference between economic and accounting profit? Economic profitEconomic ProfitEconomic profit refers to the income acquired after deducting the opportunity and explicit costs from the business revenue (i.e., total income minus overall expenses). Accounting profit vs. economic profit Another term you might come across when researching accounting profit is economic profit. Furthermore, once the companys free cash flow is calculated, it must then take into account the opportunity cost that managers of the business can expect to earn on comparable alternatives. Accounting profit includes what's left after subtracting explicit costs and depreciation from total revenue. To calculate your accounting profit or net income, youd use the equation: Total revenue Total costs = Accounting Profit. In other words, a business can calculate its economic profit by subtracting its implicit expenses from its accounting profit. Economic profit differs quite significantly from accounting profit. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Not sure what makes up your total revenue and total expenses? Identify your study strength and weaknesses. Next, determine your net working capital to find out your companys liquidity and ability to handle financial obligations. So, what is the relationship between accounting profit and economic profit? Clifford produces 20 shoes at a cost of $220 and sells all 20 shoes for a total of $300. Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. E.g., Mrs. 'B' is running a pastry shop and must maintain track of their earnings. Accounting profit refers to the Gross revenue minus the explicit costs (deductible expenses). Accounting Profit vs. Economic Profit. More about Economic Profit vs Accounting Profit, Monopolistic Competition in the Short Run, Effects of Taxes and Subsidies on Market Structures, Determinants of Price Elasticity of Demand, Market Equilibrium Consumer and Producer Surplus, Price Determination in a Competitive Market. Ascent shows you how to calculate and analyze it. For example, the implicit costs could be the market price a company could sell a natural resource for versus using that resource. You can determine economic profit by subtracting total costs from a company or investment's total revenue or return. Read our article on Opportunity Cost to learn more! Save my name, email, and website in this browser for the next time I comment. . For example, imagine a company has two choices: Invest $1,000 into a new t-shirt product line (Project #1)or invest $1,000 into a new sock product line (Project #2). Let us discuss what abnormal profit is, how it exists, and what are its advantages and disadvantages. It is quite similar to that of the accounting profit, the main point which distinguishes it from all other profits is the implicit cost, which mainly revolves around the concept . Based on the above, we can also say that economic profit refers to total revenue minus total opportunity cost. Explicit costs include wages, leases, utilities, and the cost of raw materials while implicit costs include any opportunity costs, such as the loss of interest on an investment. CFA And Chartered Financial Analyst Are Registered Trademarks Owned By CFA Institute. NVIDIA. Using the formula above, we can determine that the economic profit of producing these toys is $3,000 ($10,000 - $5,000 - $2,000). \(Economic\ Profit=Total\ Revenue\ (TR)-Explicit\ Costs\ (EC)-Implicit\ Costs\ (IC)\). The implicit costs would be the salary that she gave up from her old job, which was $60,000. The accountant shall consider accounting profit as they will consider production costs and their impact on profitability. Another difference is that accounting profit will always be higher than economic profit as economic profit considers the additional opportunity costs borne by a firm. Accounting profit is the net income for a company or revenue minus expenses. Accounting profit is an indicator of the company's financial performance and tells you exactly how profitable it is in terms of money. Implicit Costs= $50,000. Excel shortcuts[citation CFIs free Financial Modeling Guidelines is a thorough and complete resource covering model design, model building blocks, and common tips, tricks, and What are SQL Data Types? Stop procrastinating with our smart planner features. Accounting profit is the net income available after deducting all explicit costs and expenses from total revenue, and it is calculated in accordance with generally accepted accounting principles (GAAP). Economists say that a firm is making normal profit when the economic profit is equal to zero. Remember that economic profit is based on estimates and assumptions while accounting profit is the figure that companies report for tax purposes and to investors. Residual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. Lets say you own a hair salon. For instance, NVIDIA (NVDA) reported total net income or accounting profit of $9,75 billion for the 2022 fiscal year compared to the $4.33 billion it earned in 2021. StudySmarter is commited to creating, free, high quality explainations, opening education to all. Lets say you own a hair salon. Zero accounting profit, though, means that a company is running at a loss. This is because while accounting profit only looks at the outlay of money given to produce a given good, economic profit looks at both explicit and implicit cost, which come together to form the total opportunity cost of producing the good. Accounting profit is a companys net earnings on its income statement, whereas economic profit is the value of cash flow thats generated above all other opportunity costs. \(Economic\ Profit=Total\ Revenue\ (TR)-Opportunity\ Costs\ (OC)\). This guide will help you thoroughly understand accounting profit vs economic profit, and while they may sound similar, they are actually quite different. Be perfectly prepared on time with an individual plan. 1. Companies use accounting profit to figure out how much profit the business actually made in a specified period. She has published articles in The Boston Globe, Yankee Magazine, and more. Katrina vila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications. We will use an example to help get you familiar with calculating your accounting profit. A rational agent considers both accounting profit and economic profit. Accounting profit is often higher than economic profit, since economic profit considers both explicit and implicit costs. Accounting profitis also knownas a company's earned profit, net income, or bottom line. The fact that economic profit will measure the cash flow of a business and the accounting profit will measure the profit based on accrual. Economic profits are determined separately without your accounting books or software. Accounting profit is usually higher than both economic and normal gain. Investopedia does not include all offers available in the marketplace. Economic profits may not provide the correct picture of . Why or why not? As the name suggests, the economic Profit reflects the impact of different economic decisions of a company's management. These are the explicit costs incurred by the firm. Accounting profit subtracts only explicit costs from revenue. It will also analyze how those strategies can impact the firm and the economy. Economic profit signifies how efficiently the company is allocating its resources for earning revenue. Financial analysts use the economic profit for several reasons including: When calculating economic profit, we ignore net income and instead consider the actual amount of cash made by the company or free cash flow. The accounting profit itself can be manipulated by companies to a point, which leads investors to look for more obvious signs of financial stability. \(Total\ Revenue\ (TR)-Explicit\ Costs\ (EC)-Depreciation\). Economic profit is the difference between the revenue obtained from the sales of products or services and costs spent to produce them, including opportunity costs (benefits a company loses because of not choosing a different alternative) and explicit costs (expenses on lease payments, inventory, raw materials, and utilities). How much money did your business make this year? Due to accrual accounting principles, the figure is often materially different from accounting profit. Economic profit is a type of profit that considers the implicit costs from all inputs in addition to the explicit costs. These costs represent what you could have sold a product or service for. Total revenue refers to the price per product multiplied by the quantity of the product sold. Companies report their accounting profits to investors on their income statements and to the IRS for tax purposes. Economic profit is almost identical to accounting profit - the only difference being that economic profit also considers opportunity cost. * Please provide your correct email id. accounting profit can be referred to as the revenue obtained by a firm after all the economic costs are met. Revenue vs. Income: What's the Difference? It involves expenses such as depreciation. Create beautiful notes faster than ever before. Therefore, the common element between economic profit and accounting profit is explicit cost. This is just because of the various differences between the two terms and we have entitled it as accounting profit vs . So, what do these costs refer to? Instead of looking at net income, economic profit considers a companys free cash flow, which is the actual amount of cash generated by a business. Therefore, profit refers to the total revenue minus the total production costs. Untuk mempertahankan laba dalam bisnis apa pun, lebih banyak pendapatan (dengan menjual bahan mentah dan barang) akan memaksimalkan laba ekonomi. Economic profit is a type of profit that considers the implicit costs from all inputs in addition to the explicit costs. You are free to use this image on your website, templates, etc., Please provide us with an attribution link. Accounting profit is the net income that a company generates, found at the bottom of its income statement. Economic profit includes explicit and implicit costs, which are implied or imputed costs. Here is a list of key differences between economic versus accounting profit: Accounting profit is reflected on a company's income statement whereas economic profit is not Economic profit is a theoretical number companies use to evaluate different business investment alternatives Accounting profits account for the actual revenues and expenses So, where do we begin to see the difference between economic profit and accounting profit? Clifford could have produced 20 belts instead of shoes and would have made $50 more. Your economic profit is $250,000 + $20,000 - $25,000 - $60,000 = $185,000. Abnormal profit refers to the unusual profit generated by a business due to an added advantage or market structure. Accounting profit is used to assess a company's performance and compare its financial position to competitors. Best study tips and tricks for your exams. Companies are only required to report one form of profit to the Internal Revenue Service (IRS) for tax purposes: accounting profit. Explicit costs amount to $5,000 and implicit costs to produce them total $2,000. EBIT = Operating profits + Non- operating income Finally, we deduct taxes (T) and interest (I). Accounting profit is found at the bottom of your income statement. Economic Profit Here's another way to think about it. Concluding remarks on the relationship between economic and business profit. Its 100% free. Highlights efficiency of the company in resource allocations. This guide will help you thoroughly understand accounting profit vs economic profit, and while they may sound similar, they are actually quite different. Accounting profit can be referred to as the revenue obtained post-meeting all economic costs, and Economic profit is obtained when revenue exceeds the opportunity cost. if a firm's TR can cover explicit costs but not implicit costs. You now know when to utilize accounting vs economic profit. Operating Margin vs. EBITDA: What's the Difference? Accounting profit = total revenue - total explicit cost. We need to first understand the concept of profit to provide the definitions of economic profit vs accounting profit. Economic profit involves the opportunity costs connected with production and is, therefore, cheaper than accounting profit. The implicit costs would be the salary that she gave up from her old job, which was $60,000. Consider the example below. Accounting profit is a company's net earnings on its income statement, whereas economic profit is the value of cash flow that's generated above all other opportunity costs. The accounting profit can be described as the profit that is earned and reported on the income statement. In the above analysis of economic profit, after the implicit costs were subtracted from the accounting profit, we got a positive number which is greater than . Accounting profit is the total income of the firm during the year. Your economic profit can vary depending on economic principles and opportunities. For a detailed explanation of how to perform the calculation, see CFIs Ultimate Cash Flow Guide. Sign up to highlight and take notes. It is important to note that since firms aim to make as much profit as they can, the firm will stay in business as long as it is making a positive or zero economic profit. An explicit cost refers to an outlay of money. Below is an example (simplified) calculation of how to calculate the economic profit of each project. Revenue vs. List of Excel Shortcuts Profit in economics is defined as total revenue minus total. Normal profits arise when the total revenue in business equals the total cost of operation. to find out your companys liquidity and ability to handle financial obligations. (SEC) requires that companies report their accounting profit. Have all your study materials in one place. Accounting Profit is used to know the company's profitability; Economic Profit is used to understand the company's financial position. By registering you get free access to our website and app (available on desktop AND mobile) which will help you to super-charge your learning process. Accounting profits of the company signifies the profitability of the company. By doing this, economists are subtracting the opportunity cost from the total revenue. In this video, see an example highlighting the difference between accounting profit and economic profit from a business and a discussion of explicit and implicit costs of operating a business. Economic Profit lets you know if your business is profiting more than the opportunity cost of capital. Copyright 2022 Coastal Kapital | All Rights Reserved | Design by Deviate Agency. So, what are the differences between economic profit and accounting profit? The economic profit of a business will generally be lower than its accounting profit due to the added deduction of implicit costs. Accounting profit is the reflection of a company's profitability. And when the total costs are equal to the total revenues, this is known as zero economic profit. As such, accounting profit represents a company's true profitability while economic profit is indicative of its efficiency. Accounting profit only looks at explicit cost, whereas economic profit looks at both explicit cost and implicit cost. In order to calculate economic profit, add together both explicit and implicit costs. Learn more in CFIs Economic Value Added Guide. These companies, like Warren Buffetts Berkshire Hathaway, believe that accounting profit understates what the business true income actually is. Accounting profit vs economic profit: The term profit in general, is the difference between the total revenues and total expenses. You can also check out our article on Total revenue, total cost, and profit. We also reference original research from other reputable publishers where appropriate. It is taken as the key measure of a successful business. Type of costs involved: Accounting profit considers only your explicit costs, such as payroll and rent. These are actual costs of the business that were paid directly to others, such as costs of goods sold, wages, and rent. Let's explain opportunity cost using an example. Accounting profit refers to total revenue minus explicit cost. ____ refers to total revenue minus explicit cost. Of all the numbers found on your balance sheet, accounting profit may be one of the most important. For example, a quickly growing company might include growth-oriented costs such as stock compensation expenses. 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