Question

What is the difference between accounting and economic profit?

Short answer

Accounting profit is the difference between total revenue and explicit costs only. Economic profit is the difference between total revenue and total cost summing up the explicit and implicit costs together.

Step-by-step solution

Step 1. Accounting profit

Accounting profit is the difference between total revenue from a business and explicit costs (out-of-pocket costs) the business has to incur.

Step 2. Economic profit

Economic profit is the difference between total revenue from a business and total costs (both explicit and implicit costs) the business has to incur.

Step 3. Difference between accounting and economic profit 

Accounting profit	Economic profit
Accounting profit considers only explicit costs of production in its calculation.	Economic profit considers both the explicit and implicit costs of production in its calculation.
Accounting profit does not give an idea of the opportunity costs of production.	Economic profit gives a clear idea of the opportunity costs of production.
Accounting profit is useful for deciding short-term decisions for a firm or a business.	Economic profit is useful for making business decisions required for sustainability in the long run since it includes both the explicit and implicit (opportunity) costs.