Question

Accounting profit differs from economic profit because:

Answer 1

Answer:

The correct option is D,economic costs are generally higher than accounting costs because economic costs include all opportunity costs, while accounting costs include explicit costs only.

Explanation:

Economic costs are usually higher because economic costs comprises of both implicit and explicit costs whereas accounting profit calculation only consider the explicit costs.

Explicit costs are the costs that require actual cash flows from the business such as the payment of rent,salaries and many more.

However,implicit costs are not real costs in actual term,they are costs of forgone benefits such as the salaries the business owner if he takes employment elsewhere.

Answer 2

Answer:

B) Economic costs include explicit costs while accounting costs do not.

Explanation:

Accounting profit is the total or net revenue of the firm which was earned in a specific accounting period or year. Accounting profit is usually misinterpreted for normal profit but they are not the same. Normal profit is the smallest amount of profit which a firm needs for its survival. This profit can only indicate whether the company can allocate its resources very well. Economic profit is the assumed surplus profit left after the total costs are deducted from the total revenue. Accounting profit contains the implicit costs while economic profit contains both the implicit and explicit costs.