What is the difference between Accounting profit and Economic profit?
Simply stated Accounting Profit equals Sales Revenue minus all costs except the cost of equity capital, while Economic Profit is Sales Revenue munus all costs including the opportunity cost of equity capital. Thus economic profit may be lower than the accounting profit. If accounting profit equals the opportunity cost of equity capital, economic profit is zero. Only when accounting profit is greater than the opportunity cost of equity capital, economic [profit is positive. Under perfect competition, all firms in the longrun earns zero economic profit. Notes: 1.Profit generally is the making of gain in business activity for the benefit of the owners of the business. The word comes from Latin meaning “to make progress”, is defined in two different ways, one for economics and one for accounting. Pure economic profit is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of
