What is Accounting Profit?
Accounting Profit is equal to total revenue minus explicit costs. It is important to note that economic profit is total revenue minus total costs, where total costs include explicit and implicit cost. Note explicit cost are those costs that require cash to be paid (i.e. hourly wages), whereas implicit costs do not require cash to be paid (i.e. time spent by the owner of a business considering an opportunity).
For example, Shoeburger Corp manufactures bar stools. If we know average price is equal to average cost at $12 to produce 20 stools and those stools have an explicit cost of $200 with an implicit cost of $40, then:
Total Revenue = $12 × 20 = $240
In this example, this would reflect an economic profit of 0
Total Revenue - (Explicit Cost + Implicit Cost) = 0
$240 (Total Revenue) - ($200 (explicit cost) + $40 (implicit cost)) = 0 ; from the information provided above.
Therefore, Accounnting Profit is $40 in this example
Total Revenue - Explicit Costs = Accounting Profit
$240 (Total Revenue) - $200 (Explicit Cost) = $40.
Let's look at another example of accounting profit vs economic profit. As a new manufacturing company, your business realized $150,000 in revenue last year and it cost $80,000 to run the business. Because you could have made $60,000 last year working for another company, but chose to run your own business, you sacrificed $60,000 (the opportunity cost) to run this new venture.
Given the above information, your accounting profit is $150,000 - $80,000 = $70,000. However, in looking at your economic profit you had $150,000 - ($80,000 + $60,000)= $10,000. When taking this information into consideration you are including the opportunity cost associated running your own business, and this shows that you are better off pursuing your new business than you would have been if you worked for another company. Keep in mind, economic profit can be a negative number, in which case you should not pursue the alternative.