Difference Between Accounting and Economic Profit

Accounting profit and economic profit are key metrics in financial analysis, each providing insights into a company's financial health. Knowing the differences between these two types of profit is essential for making smart business decisions and improving financial performance. This article will explain the differences between accounting profit and economic profit for CA Exams .

What is Accounting Profit?

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Calculation of Accounting Profit

Example:

Using the formula:

Importance of Accounting Profit Analysis

• It provides a clear picture of a company's financial performance, aiding in quick operational decisions.
• It helps evaluate how effectively a company generates profit from its core activities.
• Investors use accounting profit to gauge a company's profitability and its potential for distributing dividends.
• It is used to assess management's operational efficiency, while economic profit evaluates strategic effectiveness.
• It serves as a tool for comparing a company's performance against industry standards and competitors.

Also Check: How to Use Balanced Scorecard for Performance Management?

What is Economic Profit?

Calculation of Economic Profit

Example:

Using the formula:

Importance of Economic Profit

• It helps in making better decisions by evaluating the opportunity costs, ensuring resources are used where they create the most value.
• Analyzing economic profit provides insights into the company’s ability to sustain and grow its value over time.
• It highlights missed opportunities, aiding in more effective resource distribution.
• Economic profit can indicate potential for future growth and competitive edge, attracting investors.
• It helps businesses assess their market position by comparing not just revenues and costs but also alternative investment opportunities.

Difference Between Accounting Profit and Economic Profit