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Write the difference between accounting profit and economic profit.
The major differences between accounting profit and economic profit are as follows −
Accounting profit
It gives true financial health of a company.
It tells about profitability of the company.
No special terms are needed here.
It is more practical than economic profit.
It’s a short term phenomenon.
It is determined by GAAP.
It is used for income tax and financial performance.
It has single entity/accounting period view.
The formula to calculate accounting profit is as follows &minus accounting profit = total revenue – expenses
Economic profit
It doesn’t give true financial health of a company.
It tells about effective allocation of resources.
It includes special terms such as residual value, inflation level changes etc.
It has less practical approach than accounting profit.
It is a long term phenomenon.
It is determined by economic principles.
It is used to determine market entry/stay/exist.
It has Marco market/whole project time line view.
The formula to calculate economic profit is as follows − economic profit = opportunity cost – implicit costs (economic profit is surplus)
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