Accounting profit Accounting profits are typically: Velg ett alternativ: smaller than economic profits because the former do not take implicit costs into account. greater than economic profits because the former do not take implicit costs into account. greater than economic profits because the former do not take explicit costs into account. O equal to economic profits because accounting costs include all opportunity costs.
The correct answer and explanation is :
Correct Answer:
Greater than economic profits because the former do not take implicit costs into account.
Explanation (300 words):
Accounting profit and economic profit are two different ways of measuring a firm’s profitability, and they differ primarily in how they treat costs.
Accounting profit is the total revenue a business earns minus its explicit costs—the actual monetary expenses paid out, such as wages, rent, materials, and utilities. Accountants use this measure to report financial performance to stakeholders like shareholders, tax authorities, and regulatory agencies.
Economic profit, on the other hand, takes a broader view. It includes both explicit and implicit costs. Implicit costs are the opportunity costs of using resources the business already owns. These might include the owner’s time, capital that could have been invested elsewhere, or the use of company-owned buildings or equipment that could generate income if rented out.
Because economic profit subtracts both explicit and implicit costs, it is generally lower than accounting profit. For instance, if a business owner earns \$100,000 in revenue and has \$60,000 in explicit costs, the accounting profit is \$40,000. But if the owner could have earned \$30,000 working elsewhere (an implicit cost), the economic profit would be only \$10,000.
Understanding this distinction is crucial in economics because economic profit provides a better measure of whether a business is making the best use of its resources. A firm with zero economic profit is still covering all its opportunity costs, meaning resources are being used efficiently. In contrast, a firm with zero accounting profit is not even covering its explicit costs and is likely unsustainable.
In summary, accounting profit is typically greater than economic profit because it ignores implicit costs, which are critical for evaluating the true profitability and efficiency of business operations.