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The difference between accounting profit and economic profit

The difference between accounting profit and economic profit
The difference between accounting profit and economic profit


profits

The profits resulting from the work of a financial institution or company are the main measure of the success of its performance and to measure the extent of its success in achieving its financial goals. The percentage of profits is calculated after deducting the total costs from the total revenues. On this basis, the tax imposed on the financial institution is calculated as a percentage of net profits, and is reflected Profits in the institution reduce financial obligations and help increase assets or property rights, in addition to contributing to the provision of investment resources for future operations, and the absence of profits leads to the extinction of the company or the deterioration of its financial and economic condition, and profits are often divided into two types: accounting profit and economic profit, The article will discuss the difference between them.

The concepts of accounting profit and economic profit

Accounting profit is the profit generated after deducting all expense items in the balance sheet from revenue items. Accounting profit is used in the financial statements of the organization in order to prepare its financial reports for a specific period of time, and therefore if the total recorded revenue exceeds the total recorded expenses, the rest is the accounting profit, and on Conversely, if the total recorded revenue is less than the total recorded expenses, the rest is an accounting loss for the financial institution, and the economic profit is the difference between the budgeted revenue resulting from business and the opportunity costs of assets or costs resulting from the depreciation of assets in the business, in other words if If the recorded revenue is greater than the depreciation of assets, it is an economic profit, but if the revenue generated by a business is less than the depreciation of assets, it is an economic loss.

The difference between accounting profit and economic profit

Profit is one of the most important measures to assess the financial health of the company, but some people are confused about the difference between accounting profit and economic profit. Therefore, some important points that help differentiate them will be clearly explained:
  • The profit output from the difference between revenue and expenses shows the difference between accounting profit and economic profit. In accounting profit, revenue is deducted from the explicit costs of business, such as operating expenses, interest, and taxes. To obtain economic profit, revenue obtained from the sale of production is deducted from costs Alternative opportunity.
  • The accounting profit is recorded in the company’s financial statements, and financial institutions usually publish different versions of the financial statements to disclose their profits, because the accounting profit is a financial measure of the performance of the facility, and the economic profit is not recorded in the financial statements of the facility, and it should not be disclosed to the regulatory authorities. or investors or financial institutions.
  • The costs that are deducted from revenues show the difference between accounting profit and economic profit. The costs in accounting profit are the explicit expenses in the business such as wages, inventory needed for production, transportation cost, and sales and marketing costs. As for economic profit, costs are the interest that the business loses when choosing between alternatives, known as opportunity cost.
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