How does accounting profit differ from economic profit? Explain why accounting profit is more useful for paying your taxes while economic profit is more useful for deciding whether you should continue to stay in business. Give an example of an implicit cost and an example of implicit revenue.

Question

Quizplus · Accepted Answer

The Answer is Both measure profit as revenues less costs. However, economic profits include explicit and implicit revenues and costs in their calculations whereas accounting profit only includes explicit revenues and costs. Accounting profit is used by the taxing authorities because it is more easily measured, but economic profit is more appropriate for deciding whether or not to stay in business because it includes all relevant costs.
Implicit costs would include the opportunity cost of the factors of production that the owner supplies to his firm (e.g. his own labor). Implicit revenue would include an increase in the value of assets owned by the firm.

How Does Accounting Profit Differ from Economic Profit? Explain Why