Accounting Profit
Definition
Accounting profit is the financial measure that represents the difference between a company's total revenue and its explicit costs (such as wages, rent, and materials). It is calculated by subtracting explicit costs from total revenue.
Analogy
Imagine you're running a lemonade stand. Your accounting profit would be the money you make from selling lemonade minus all the expenses you had, like buying lemons, sugar, cups, and paying your friend who helped you. It shows how much money you actually made after considering all your costs.
Related terms
Economic Profit: Economic profit takes into account both explicit costs (like accounting profit) and implicit costs (opportunity costs). Implicit costs include things like foregone income from alternative uses of resources.
Fixed Costs: Fixed costs are expenses that do not change regardless of the level of production or sales. Examples include rent for a store or monthly loan payments.
Variable Costs: Variable costs are expenses that vary with changes in production or sales levels. They increase as more units are produced or sold. Examples include raw materials or hourly wages for workers.
"Accounting Profit" appears in:
Study guides (2)
Additional resources (2)
Practice Questions (5)
- A firm's accounting profit is calculated by subtracting which of the following costs from total revenue?
- A firm's economic profit is calculated by subtracting which of the following costs from its accounting profit?
- A firm's accounting profit can be greater than its economic profit when?
- When a firm earns an accounting profit but an economic loss, it suggests?
- A firm's accounting profit can never be negative because it only considers?
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