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With many objectives of the business, the main goal of the business is to earn profits, so the company remains operational and brings economic stability to the people affiliated with it. The profit is the reward for the entrepreneur or the business man who bears the risk and offers the services to the people. In the common mindset, profit is the difference between the costs and revenue of the company, the three terms accounting profit, economic profit, and normal profit are similar in many regards but yet they differ from each other in many ways. The accounting profit is the net income which remains after the deduction of the explicit cost of it. To calculate the accounting profit one needs to subtract the explicit cost from the total revenue of the company. On the other hand, economic profit is the supernormal profit as it is the difference between the revenue generated and the total cost (including explicit cost well as implicit cost). Conversely, the normal profit is the situation of the firm when its accounting profit is equal to zero as in this the profit there is not any difference between the revenue collected and the cost spent by the firm.
What is Accounting Profit?
The accounting profit is the actual gains and losses made by the company in the particular year. The calculation of the accounting profit is made by the accepted accounting principles (GAAP). In easy words, we can say that it is the total revenue earned by the company after the explicit cost is subtracted from it. Other than the accounting profit, this type of profit is also known as the net income of the company. To better understand about the accounting profit, one needs to know a little more about the terms of net income and the explicit cost. The net income is the income of the company or the person after the taxes, and other deductions are made from the gross income. It should be kept mentioned that the gross income is the income of the company or the person without exclusion of expenses, taxes or any other adjustments. On the other hand, An explicit cost is a cost that is directly incurred by the firm, company or organization during the production period. In this type of cost, the outflow of cash takes place to utilize the factors of production. The record of the explicit cost is noted by the accountant of the company, and can easily be traced as each and every of the expenditure is carefully noted, and is kept as a record. If one wants to know about the profitability of the company or the firm, the accounting profit is the profit which describes it all.
What is Economic Profit?
The economic profit is the supernormal profit as it is the difference between the revenues generated and the total cost (including explicit cost well as implicit cost). It is quite similar to that of the accounting profit, the main point which distinguishes it from all other profits is the implicit cost, which mainly revolves around the concept of the opportunity foregone. To know comprehensively about the concept of the economic profit, one should have the basic how to know about the implicit cost. Implicit cost is the cost that is not directly incurred by the firm or the company. In this type of cost, an outlay of cash doesn’t take place, so that is why it isn’t noted, and subsequently, it can’t be traced. It mainly revolves around the concept of opportunity cost, which tells about the (indirect) cash or profit foregone due to opting the alternative. The loss or the profit in the implicit cost doesn’t directly have any impact on the profitability of the company.
What is Normal Profit?
The normal profit is the type of profit earned by the company or the firm when the difference between the total revenue collected and the total cost becomes zero. In other words, we can say that it is the breakpoint for the company to remain in the market competition. Anything less than this profit will be the loss to the enterprise. For instance, when we establish a firm, the very immediately we are not up with the profits. The company requires time to stabilize its operations and then to earn the profits. And when the company reaches the breakpoint or collects the revenue as much as the cost of production then this type of profit is known as the normal profit. It should be kept mentioned that when the economic profit of the company is equal to zero, then the company is said to be in the state of normal profit. Therefore, the economic profit also called the ‘zero economic profit.’
Accounting, Economic vs. Normal Profit
- The accounting profit is the actual gains and losses made by the company in the particular year. On the other hand, the economic profit is the supernormal profit as it is the difference between the revenues generated and the total cost (including explicit cost well as implicit cost).
- The calculation of the accounting profit is made by the accepted accounting principles (GAAP). Contrary to this, the economic profit is not calculated using GAAP it revolves around the concept of implicit costs and the opportunity foregone. At the same time, normal profit is evaluated by assessing the difference between the total revenue and the cost.
- The accounting profit tells about the profitability of the company, whereas the economic profit, tells about that how well the company is allocating its available resources. The normal profit tells that whether the firm is collecting the revenue equal to the cost.
- Accounting Profit = Total Revenue – Total Explicit Cost, Economic Profit = Total Revenue – (Total Explicit + Total Implicit Cost), Total Revenue = Total Cost (i.e. explicit and implicit).