Economic Profit (Or Loss)
Categories: Econ, Accounting
Economic profit isn’t your grandma’s accounting profit.
Accounting profit and loss only takes into account the numbers with things that had price tags on them...you know, all the stuff that’s on a balance sheet or cash flow statement.
Economic profit and loss is different, because it not only takes into account the usual accounting, but also the opportunity costs of the money spent.
For instance, the accounting profit of a diner would be their inflow of cash from diner customers minus their operating costs (food costs, labor costs, and rent). Say the diner makes $2,000 in accounting profits a month. Economic profit goes beyond and asks, “would you be able to make a higher profit doing something else with the resources you have at your disposal?”
Say the diner owner, Mary, does the math, and finds out her store, given its location, could turn a higher profit of $2,500 if she gutted it and just rented the place out to another business. Mary would have never seen this opportunity if she had only stayed within the confines of accounting profit. Because she looked at her opportunity costs, she could see she was losing potential money to be gained ($500/mo) by running the diner as it was.
Hail Mary! Hail economic profit!
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Finance: What are operating profits, net...59 Views
finance a la shmoop.what are gross profits operating profits and net
profits? well the greatest fishing company that walks the earth or swims
the ocean made a fortune last year from selling nets. catching things like well [fish is caught from the ocean]
me. but that's really a different thing and no Bueno. leave us alone. in an
accounting sense net profits come after operating profits that come after gross
profits .and the net thing is well pretty much taxes. so here's an income statement
yeah yeah revenues and then there's the cost of the stuff you're selling. okay
fine. we'll note the nets only cost a little bit to make and you sell them for
a fortune .way overpriced if you ask me. like whatever happened to line fishing
anyway lazy humans. so you have your revenues then your cost of goods sold.
all right well if you subtract those cogs from the revs you get your gross [income statement pictured]
profits. yeah gross just gross and sad frankly like why not eat more chicken
seriously. anyway .so then you have your costs of operating the business you know
overhead. secretaries and insurance and rent and fish-smell deodorizer. and then
you have operating profits after you subtract. them yep you subtract those
right from gross profits. get operating. so you made some number let's call it 10
million bucks why not .you know how many of my brethren died to give you that
money right? blood money. talk to Leo to see about it.
maybe he'll make a movie . anyway let's say the tax rates 30% well you'd pay 3
million in taxes on that 10 million of operating profit to then have net
profits of seven million dollars. lots of profits .there people. yeah hope you can [equation]
sleep at night.