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Management Principles & Practices: Done By, Preethi, Reecha Jain, Sowmya .R

This document discusses accounting profit and economic profit. Accounting profit is calculated by subtracting explicit costs like wages, materials, and rent from total revenue. Economic profit considers implicit opportunity costs of self-owned resources like land and capital in addition to explicit costs. The difference is that economic profit measures long-term profitability by including these implicit costs, while accounting profit only considers costs for a specific period. Managers prefer economic profit over accounting profit as it indicates true long-run profitability and guides strategic decision making.

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Jaya Preethi Doraisamy
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77 views

Management Principles & Practices: Done By, Preethi, Reecha Jain, Sowmya .R

This document discusses accounting profit and economic profit. Accounting profit is calculated by subtracting explicit costs like wages, materials, and rent from total revenue. Economic profit considers implicit opportunity costs of self-owned resources like land and capital in addition to explicit costs. The difference is that economic profit measures long-term profitability by including these implicit costs, while accounting profit only considers costs for a specific period. Managers prefer economic profit over accounting profit as it indicates true long-run profitability and guides strategic decision making.

Uploaded by

Jaya Preethi Doraisamy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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MANAGEMENT PRINCIPLES &

PRACTICES
Done by,
Preethi,
Reecha Jain,
Sowmya .R.

CONTENTS
Accounting Profit
Economic Profit
Difference between accounting profit &
economic profit
ACCOUNTING PROFIT
The accounting profit used by accountants to determine
a firm's taxable income.
The Formula for Accounting Profit is;

Accounting Profit = Total Revenue - Explicit Costs

Explicit costs are the actual cash payments for
resources purchased in resource markets.
These are the rent paid on land and plant and
equipment, wages to labor, interest on capital, cost of
raw material, transport charges etc., etc.
Thus, all these explicit costs are subtracted from the
firm's total revenue, we get accounting profit.


ECONOMIC PROFIT
Accounting profit ignores the opportunity cost of the firm's
own resources used in the production of goods.
The economist include these costs named as implicit costs
while determining the total cost of production.
A firm's Implicit costs are the opportunity costs of using its
self owned, self employed resources.
The Formula for Economic Profit is;

Economic Profit = Total revenue - (Explicit Cost + Implicit Cost)
Where,
Implicit cost refers to entrepreneurs wages, rental income on self
owned land and interest on self capital.
Explicit cost is expenses incurred in earning a revenue eg:
payment to employees, rent payment.

Economic profit takes into account the opportunity costs
of all resources used in production.
In simple words, the difference between the revenue
received from the sale of an output and the cost of the
inputs used.
Implicit costs also include normal profit earned by a firm
Normal profit is the minimum amount required to keep on
entrepreneur engaged in the present line of production.



THE DIFFERENCE BETWEEN ECONOMIC PROFIT
& ACCOUNTING PROFIT
Manager gives more important to Economic profit than
Accounting profit because;
Accounting profit is calculated only for a period of time but
Economic profit is calculated over long run.
Although, accounting profit involves non-cash
transactions/adjustments for depreciation, allowances,
provisions, capitalising development costs, leased
assets, etc.
It is calculated for whole of the entities business.
As economic profit is calculated for long run, the profit
is in real terms. .


Why manager prefer economic profit?
It indicates the true profitability position of an enterprise.
It is a tool for overall measurement of managements
performance.
Also ideal for setting corporate goals, management incentives
and payment of bonuses.
It can be readily communicated and understood by operational
management.
It focuses management on improving profit without making
additional investment.
It guides the owner whether to enter/stay in market or exit it.

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