Question

Distinguish economic versus accounting profits and costs.

Short answer

The difference between the economic and accounting profits and cost are stated below.

Step-by-step solution

Introduction

Profit is a firm’s net earnings after covering all kinds of expenses. Profit is calculated as the economic and accounting profits.

Distinguishing between economic and accounting profit and costs.

(1) a) The accounting profit is a metric that is of importance to the accountant.

b) The economic profit is a metric that is of importance to the economist.

(2) a) The accounting profit is defined in terms of net income that the business generates or earns through the course of the accounting or financial year.

b) The economic profit is defined as the surplus that remains with the business after total opportunity costs are deducted from the revenues earned.

(3) a) The account profit is regarded as relevant in terms of accounts and financial perspective.

b) The economic profits are derived from certain assumptions and estimations and generally cannot be regarded as relevant as the metric is just a precision.

(4) a) The accounting profits reflect the true profitability of the business in accounting terms.

b) Economic profit indicates the efficiency level of the business in terms of how they utilize their resources to drive maximum value generation.

(5) a) The accounting profit is determined as the difference in total sales or revenues generated by the business with the explicit costs.

b) The economic profit is determined as the difference between the total revenue or sales generated by the business and the sum of explicit costs and implicit costs.