The difference between Accounting and Economic profit.

Updated: Sep 30, 2019


There are significant confusion and misleading perceptions regarding the difference between economic and accounting profit. Even though they both examine a business’ profits, the approach however is from a different angle and as a result the profit result differs.

Accountant’s estimations - In general: The accountant estimates the profit of an entity based on present and future (as per predictable budget) financial situation.

Economist’s estimations - In general: The economist estimates the opportunity cost or simply, how much the business could make if it followed a different strategy, by comparing it with either an existing entity or with various other made up opportunity cases.

THE DIFFERENCE WITH AN EXAMPLE

Let's say that somebody did some research on what type of business to start, having two options - clothing store VS restaurant. At the end that person decided to start the clothing store.

A year later, the profit is £ 67,000 before tax. However, the entrepreneur still wonder how much he would have made if the choice were a restaurant.

In order to better understand the approach of accountant and economist measurements, we have created an indicative table below:

CONCLUSIONS

Using the above example, we can understand that what is considered profit for an accountant can actually be not so (or satisfactory) for an economist.

In any case, the economist’s theory would have to be concrete in order to be accepted, if for example instead of a simple theoretical opportunity study, there was a real offered contract which was rejected (or replaced) by the entrepreneur for the existing (in our example clothing store) situation. Also, an example would be if he had an alternative proposition with a salary contract which he rejected.

Translated / Edited: Apostolia Nestoratou

© 2019 UPECO LTD

ATTENTION! This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.

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