Accounting Profit vs Economic Profit
Accounting Profit and Economic Profit are two Production & Costs concepts in AP Economics that students often mix up. In short: accounting profit is accounting profit is total revenue minus explicit costs, as recorded on a firm's financial statements. Meanwhile, economic profit is economic profit is total revenue minus both explicit and implicit costs, including opportunity costs. Here is how they compare side by side.
Accounting profit is total revenue minus explicit costs, as recorded on a firm's financial statements.
Explicit costs are direct, out-of-pocket payments like wages, rent, and materials. Accounting profit does not include opportunity costs, so it is typically higher than economic profit. It is used for tax and reporting purposes.
Economic profit is total revenue minus both explicit and implicit costs, including opportunity costs.
Implicit costs represent the value of resources the firm owns, such as the owner's time or capital. Economic profit accounts for all costs of production, making it a better measure of true profitability. A firm earns zero economic profit when it covers all opportunity costs.