What is Accounting Profit?
Accounting is the recording and reporting of financial transactions for a business, organization, or individual. It is used to analyze and report financial information and to make informed financial decisions. Any successful firm needs accounting to function.
Accounting involves recording financial transactions, such as an individual or organization’s purchases, sales, receipts, and payments. The transactions are recorded in an accounting system used to create financial statements. These financial statements provide an overview of the business’s financial position at a given time.
Accounting is also used to analyze and interpret financial information. Accounting also involves the preparation of taxes. They also prepare tax returns, calculate taxes due, and make sure taxes are paid on time.
What is Economic Profit?
Economics is a social science that examines how products and services are produced, distributed, and consumed. It focuses on how individuals, businesses, and governments make decisions that affect the supply and demand of goods, services, and resources. It also examines how these decisions affect the overall economy.
Economics is a crucial component of public policy, as it helps inform governments and policymakers on the best ways to allocate resources and manage the economy. It also helps businesses understand how to maximize profits and identify new markets. Economists use various tools, including mathematical models and empirical evidence, to analyze economic data and make predictions.
What is Normal Profit?
Average profit is an economic profit that arises when a company can cover its costs but not earn any additional profit. It is not a zero-sum game; instead, it is the minimum level of profit that a company must make to stay in business. The cost of production and the price of the goods or services determine this type of profit. Normal profit includes:
- The salaries and wages of employees.
- The cost of raw materials and other inputs.
- The cost of capital.
- The cost of taxes and other fees.
It also includes business costs like marketing, advertising, and research and development. A company must account for all these costs to remain profitable.
Difference Between Accounting, Economic and Normal profit
Accounting focuses on the recording and analysis of financial transactions, while economics focuses on allocating resources.
Accounting is concerned with the preparation of financial statements, while economics is concerned with the study of how people make decisions regarding the use of resources.
Economics involves the analysis of economic data, while average profit is calculated from the market demand and supply.
Economics relies on theories, models, and principles to explain economic events and outcomes, while average profit is an accounting concept.
Average profit is the expected return on investment, while accounting records, classifies, and summarizes financial transactions.
Average profit is the return a business expects to make above the opportunity cost while accounting records systematically, verifies, and summarizes financial transactions.
Comparison Between Accounting, Economic, and Normal Profit
| Parameters of Comparison | Accounting Profit | Economic Profit | Normal Profit |
| Scope | Focuses on recording and reporting financial transactions | Looks at the larger picture of how resources are allocated | The cost of inputs, wages, taxes, and other expenses necessary to keep a business running. |
| Tools | Uses quantitative techniques | Uses qualitative techniques | Cost-Benefit Analysis, Profit Maximization |
| Focus | Individual or organization | On the market as a whole | To cover the costs of running a business |
| Goals | Seeks to accurately record financial transactions and to provide useful information to stakeholders | Examines how to maximize efficiency and wealth in an economy | Maximize revenue, Minimize expenses, Increase profitability |
| Perspective | Takes a narrow view of financial transactions | Looks at the long-term implications of decisions made | Should make enough money to cover all of its costs |