Accounting Profit vs Total Cost
Accounting Profit and Total Cost are two Production & Costs concepts in AP Economics that students often mix up. Accounting profit is total revenue minus explicit costs, as recorded on a firm's financial statements. Total Cost is the sum of all fixed and variable costs incurred by a firm in producing a given level of output. Here is how they compare side by side.
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.
It represents the full economic expense of production and is calculated by adding fixed costs and variable costs at each output level. Total cost starts at fixed cost when output is zero.
Accounting Profit vs Total Cost: A Residual and a Sum
| Accounting Profit | Total Cost | |
|---|---|---|
| What kind of number | A residual: what is left over | A sum: what was spent |
| Which costs enter it | Explicit payments only | Explicit plus implicit costs, in the economist's cost curves |
| What it varies with | The reporting period | The quantity produced |
| Value at zero output | Negative by the size of the payments still owed | Equal to total fixed cost |
| Subtract it from total revenue and you get | Nothing; it is already net of costs | Economic profit, not accounting profit |
| Where it shows up | Income statements and cost-classification questions | Cost tables, and the base for average total cost |
Subtracting total cost from revenue gives economic profit, not accounting profit
The total cost drawn on economics cost curves already contains implicit costs, so revenue minus that total is economic profit. Work through a shop whose owner left a job paying 48 to run it. Revenue for the period is 260. The explicit bill is wages of 90, rent of 40 and materials of 60, or 190 in all. Accounting profit is 260 minus 190, which is 70. The forgone salary of 48 never appears on that statement, yet it is a real cost of using the owner's own time. Add it and total cost becomes 238, so total revenue minus total cost is 22. Both figures describe the same shop over the same period, and the gap between them is exactly the 48 the accountant left out. When a question hands you a cost table and asks for profit, the answer is the 22, not the 70, unless the stem says the listed costs are out-of-pocket payments only. The two computations sit side by side at /calculate/accounting-profit and /calculate/economic-profit.
Total cost is a function of quantity; accounting profit is a figure for a stretch of time
A cost schedule assigns a different total cost to every output level, so a firm has one total cost at 30 units and another at 40, and the question is meaningless until you name the quantity. Accounting profit has no such column. One number covers a quarter or a year, computed after the fact from revenue and recorded payments. The difference shows up in the sign as well. Total cost stays positive at every output, and at zero output it does not vanish but falls back to total fixed cost, since rent and insurance keep running. Accounting profit at zero output is negative by the size of those same payments. The exam consequence is the profit rectangle on a perfect competition diagram: it is drawn between price and average total cost, so it measures economic profit, which means a firm sitting at zero profit in long-run equilibrium is still posting a positive accounting profit equal to its /glossary/implicit-costs. That amount is /glossary/normal-profit, and describing such a firm as earning nothing is the error graders watch for.
Frequently asked questions
Is total cost the same as explicit costs?
No. Explicit costs are the payments a firm actually makes to outsiders, while total cost as economists use it also includes implicit costs such as the salary an owner gave up. A firm can report costs of 190 to its accountant and face a total cost of 238 in the economic sense at the same output. The gap is the value of resources the owner already owns and could have rented or sold elsewhere.
Can a firm have positive accounting profit and negative economic profit?
Yes, and the case is common. Suppose revenue is 260 and explicit costs are 190, giving accounting profit of 70. If the owner gave up a salary of 90 to run the business, total economic cost is 280 and economic profit is negative 20. The owner is ahead of someone with no business at all, but behind where they would be taking the job back, which is what negative economic profit means.
Does the profit rectangle on a cost curve diagram show accounting profit?
No. Average total cost on that diagram is built from economic cost, so the box between price and average total cost measures economic profit. A perfectly competitive firm in long-run equilibrium sits where price equals minimum average total cost and the box has zero height, yet its owner is still covering the opportunity cost of their own time and capital. See /micro/perfect-competition for how that equilibrium is reached.
Live Production Costs graph. Drag the curves, or open the full version.
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