Accounting Profit vs Economic Profit Calculator
Calculate accounting profit and economic profit.
Understand the difference between explicit costs, implicit costs, and opportunity cost in business decisions.
Accounting Profit vs. Economic Profit
These two profit measures tell very different stories about a business’s health.
Accounting Profit
What shows up on a tax return or income statement: Accounting Profit = Total Revenue − Explicit Costs
Explicit costs are actual cash payments:
- Wages paid to employees
- Rent for facilities
- Cost of raw materials and inventory
- Loan interest payments
- Utility bills
Economic Profit
The true economic measure — what economists use to decide if a business is viable: Economic Profit = Total Revenue − Explicit Costs − Implicit Costs
Implicit costs are opportunity costs — the value of what the owner gives up:
- The salary the owner could earn working for someone else
- Return on invested capital if invested in the market instead
- Foregone rental income if the owner uses their own building
Normal Profit
A firm earns normal profit when economic profit = 0. This means the business is exactly covering all costs, including opportunity costs. The firm earns just enough to justify staying in business.
Decision Rule
| Economic Profit | Decision |
|---|---|
| > 0 | Stay — business exceeds opportunity cost |
| = 0 | Indifferent — earning exactly the opportunity cost (normal profit) |
| < 0 | Consider exiting — better returns available elsewhere |
Real Example
An owner runs a bakery with $200,000 revenue and $150,000 in wages, supplies, and rent. They previously earned $60,000 per year as an accountant. They invested $100,000 (could earn 8% = $8,000/year in the market).
- Accounting profit = $200,000 − $150,000 = $50,000
- Implicit costs = $60,000 + $8,000 = $68,000
- Economic profit = $50,000 − $68,000 = −$18,000
The bakery looks profitable on paper but is economically destroying value.