Accounting, Economic & Normal Profit - Economics Concepts, Business Economics & Finance | Business Economics & Finance - B Com PDF Download

Introduction

What is Accounting Profit?

• Accounting profit is the total revenue of a company minus the explicit costs incurred in running the business. 
• These costs can include administration, production, transportation, and depreciation expenses. 
• Accounting profit is also known as net income, and it is a good indicator of whether a company is profitable or not. 

What is Economic Profit?

• Economic profit is the difference between the generated revenue and the total cost of running the business, where the total cost includes both explicit and implicit costs, as well as opportunity cost. 
• To understand the concept of opportunity cost, one should understand the concept of implicit cost, which is a cost that is not directly incurred by the organization as there is no cash outlay. 

What is Normal Profit?

• A business earns normal profit when total revenue equals total cost, including any subsidies. Normal profit can be viewed as a break even point for a business to sustain itself in a competitive market. 
• If revenue falls below normal profit, the business will start to incur losses. Thus, to remain operational, revenue must equal the cost of production.

Comparison between Accounting Profit, Economic Profit and Normal Profit