Accounting profit, normal profit and economic profit

After you have worked through this section of the learning unit, you should be able to:

  • distinguish between accounting profit, normal profit and economic profit

Total profit is equal to total revenue minus total cost. Since accountants and economists calculate costs differently, their profit estimates will also differ.

Accounting profit is total revenue minus explicit costs, while economic profit is total revenue minus explicit and implicit costs.

Based on the example of Thabo, this is how an accountant and an economist would calculate total cost:

An accountant uses only explicit cost

Salary for law clerk: R120 000
Administration costs: R 80 000
Total explicit cost: R200 000

 An economist uses both explicit
and implicit costs

Salary for law clerk: R120 000
Administration costs: R 80 000
Total explicit cost: R200 000

Rent: R 60 000
Own salary: R450 000
Total implicit cost R510 000
Total cost R710 000

Assume that Thabo's total revenue is R750 000.

  • What is his accounting profit?
  • What is his economic profit?
Click to Show Answer

Accounting profit is total revenue minus explicit cost = R750 000 – R200 000 = R550 000.

For an economist the economic profit is total revenue minus explicit and implicit costs = R750 000 – (R200 000 + R510 000) = R40 000.