Accounting vs. Normal Profit
With many objectives of the business, the main goal 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 businessman 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, 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 that remains after the deduction of its explicit cost of it. To calculate the accounting profit one needs to subtract the explicit cost from the total revenue of the company.
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.
Key Differences
Accounting Profit = Total Revenue – Total Explicit Cost, Total Revenue = Total Cost (i.e. explicit and implicit).
The calculation of the accounting profit is made by the accepted accounting principles (GAAP). At the same time, normal profit is evaluated by assessing the difference between the total revenue and the cost.
The accounting profit is the actual gains and losses made by the company in a particular year. On the other hand, the normal profit is the revenues generated and the total cost (including explicit cost well as implicit cost).
The accounting profit tells about the profitability of the company. The normal profit tells whether the firm is collecting the revenue equal to the cost.
Comparison Chart
Definition
The accounting profit is the actual gains and losses made by the company in a particular year.
The normal profit is the situation of the firm when its accounting profit is equal to zero.
Calculation
The calculation of the accounting profit is made by the accepted accounting principles (GAAP).
The normal profit is evaluated by assessing the difference between the total revenue and the cost.
Tells
The accounting profit tells about the profitability of the company.
The normal profit tells whether the firm is collecting the revenue equal to the cost.
Formula
Accounting Profit = Total Revenue – Total Explicit Cost
Total Revenue = Total Cost (i.e. explicit and implicit)
Accounting and Normal Profit Definitions
Accounting
The practice or profession of maintaining the financial records of a business, including bookkeeping as well as the preparation of statements concerning the assets, liabilities, and operating results.
Accounting
Present participle of account
Accounting
(business) The development and use of a system for recording and analyzing the financial transactions and financial status of an individual or a business.
Accounting
A relaying of events; justification of actions.
He was required to give a thorough accounting of his time.
Accounting
(law) An equitable remedy requiring wrongfully obtained profits to be distributed to those who deserve them.
Accounting
A convincing explanation that reveals basic causes;
He was unable to give a clear accounting for his actions
Accounting
A system that provides quantitative information about finances
Accounting
The occupation of maintaining and auditing records and preparing financial reports for a business
Accounting
A bookkeeper's chronological list of related debits and credits of a business; forms part of a ledger of accounts
Accounting
A statement of recent transactions and the resulting balance;
They send me an accounting every month
What is Accounting Profit?
The accounting profit is the actual gains and losses made by the company in a 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 accounting profit, one needs to know a little more about the terms of net income and 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 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 that describes it all.
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 a loss to the enterprise. For instance, when we establish a firm, very immediately we are not up with the profits. The company requires time to stabilize its operations and then earn 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 a state of normal profit. Therefore, the economic profit is also called the ‘zero economic profit.’
