Try the multiple choice questions below to test your knowledge of Chapter 15. Once you have completed the test, click on 'Submit Answers for Grading' to get your results. Show
If your lecturer has requested that you send your results to them, please complete the Routing Information found at the bottom of your graded page and click on the 'E-Mail Results' button. Please DO NOT forward your results unless your lecturer has specifically requested that you do so. This activity contains 20 questions.
Difference Between Accounting Profit vs Economic ProfitThe accounting profit can be described as the profit that is earned and reported on the income statement. The economic profit is defined as the profit that the business derives over and above the opportunity costs. The accounting profit can be found at the bottom line of income statement whereas economic profit has to be determined by determining the free cashflows. The accounting profit can be defined as the profit that the business earns as per the book of accounts of the business. The accounting profit is determined as the difference of total sales generated by the business and the costs incurred by the business that could be accounted explicitly. The explicit costs may comprise of cost of goods sold, operational expenses and non-cash expense. The revenues or sales are generally income that the business generates while performing business activities. The economic profit on the other hand is determined by taking the difference of revenues generated by the business and the sum of implicit and explicit costs generated by the business. The implicit costs are generally regarded to the opportunity costs that the business has to bear for foregoing an opportunity by selecting an alternative through the course of business. The business generally has access to the alternatives at hand basis which selection of any one of them results in commitment of organizational resources and the business cannot back track on their decisions as they would had exercised their choice or option of selecting the best alternative or course of action from the available choices at hand. Head to Head Comparison between Accounting Profit vs Economic Profit (Infographics)Below are the top 5 differences between Accounting Profit vs Economic Profit: Key Differences between Accounting Profit vs Economic ProfitFollowing are the key differences between Accounting Profit vs Economic Profit:
Accounting Profit vs Economic Profit Comparison TableLet us look at the comparison table of Accounting Profit vs Economic Profit.
It is to be noted that the opportunity costs can never be negative as a general principle of economics and hence the economic profit has to exceed the accounting profit so that the opportunity costs tend to be positive. The reason as to why opportunity costs cannot be negative is that the business may not choose to act on the opportunities that they have on hand making them either avoid an opportunity to earn as well as to bear expenses. ConclusionA business would tend to exist only when the business is to generate economic profit that is more than accounting profit and it indicates the profit earnings capability of the business even in the near future as well as how they have performed in the past. For the shareholders, the accounting profit is regarded of the utmost importance as it presents a true picture of financial performance and generally, investors are not that much learned to compute economic profits by themselves. The economic profit is generally determined by economists and internal stakeholders to perform internal analysis by assuming assumptions and taking all opportunity costs into account as they are pursuing or chose to pursue certain activities. Economic profit can deliver approximation as to which desired direction the business has headed to. Recommended ArticlesThis is a guide to Accounting Profit vs Economic Profit. Here we also discuss the Accounting Profit vs Economic Profit key differences with infographics and a comparison table. You may also have a look at the following articles to learn more – At the point when you hear a word called ‘benefit’, the picture that strikes a chord is money-related benefits. Yet, as indicated by market analysts or economists, the benefit is much more than money-related benefits. It isn’t only cost/costs that decreased from the incomes; however, there are numerous terms for the benefits. A portion of the sorts of benefits is bookkeeping benefits or accounting profit and monetary benefits or economic profits. While the vast majority think these terms are something very similar and relate these terms to the benefits or profits of associations, they are overlooking what’s really important that these two terms are altogether not quite the same as one another. Bookkeeping benefit or accounting profit comprises of just implicit expenses though the financial benefit or economic profit comprises of both implicit and explicit costs. Meaning of Accounting Profit:Bookkeeping benefit or accounting profit is the net gain procured by the organisation in the wake of decreasing both the explicit expense and different costs from the net income acquired by the organisation by selling the centre product or service of the organisation. Bookkeeping benefit is determined in accordance with the GAAP bookkeeping principles. Explicit expenses are costs that can be estimated without any problem. It incorporates lease, work charges, authoritative expenses, bills, and so forth. Bookkeeping benefits are likewise alluded to as book benefits. Accounting profit = Total income – Explicit expenses How about we comprehend bookkeeping benefits with a model. There is a firm named XYZ which is occupied with selling pants. Assuming that the yearly turnover of the firm is Rs 1,00,000. A portion of the costs of the firm is the unrefined substance cost of Rs 70,000 and pay rates of Rs 5,000. Then, at that point, the bookkeeping benefit of XYZ is 1,00,000 – (70,000+5,000) Accounting profit = Rs 25,000 Meaning of Economic Profit:Monetary benefits or economic profits are characterised as the net benefits procured by the firm in the wake of diminishing both implicit and explicit costs like opportunity costs from the total income acquired by the organisation. Mathematically, financial benefits can be determined utilising the underneath referenced formula. Economic profit = Total income – (Explicit expense + Implicit expense) How about we attempt to comprehend financial benefits with the assistance of a model. Suppose, there is an assembling firm named XYZ that is confronting misfortunes from the most recent couple of years. The chief of this organisation recommended to its top administration that they can make due in the market by either diminishing the expense of assembling or by the expansion of new items to its product offering or product line. The top administration of the firm chooses to decrease the expense of assembling. Then, at that point, for this situation, the income that the firm couldn’t acquire as they have not launched their new items is known as an opportunity cost. This opportunity cost is the expense that must be diminished from the absolute procured income to compute the financial benefits of the firm. Difference between Accounting Profit and Economic Profit:
Conclusion:The two sorts of benefits, for example, bookkeeping benefits and financial benefits, are vital for the development of the organisation in an exceptionally competitive industry. The benefits of the organisation decide how the organisation has acted previously and how it will act later on. However, bookkeeping benefits give the genuine image of the pay of the organisation, and it helps financial backers and investors with respect to the investment choices. Financial benefits are more inside the organisation as it helps the top administration in getting to the opportunity costs in making different choices. It additionally helps in designating assets proficiently. It doesn’t make any difference in which industry your association is performing; what is important is net benefits acquired by the association. In any case, all things considered, both bookkeeping benefits and monetary benefits are incredible approaches to guaranteeing the two investors and financial backers that your organisation is performing admirably on the lookout. Also, see:Class 11 Accountancy Chapter 4 Recording of Transaction 2 What Is Working Capital in Accounting Coordination the Essence of Management Adjustment for Accumulated Profits and Losses Tools of Analysis of Financial Statements Shapes of Total Product Marginal Product and Average Product Curves Accounting for Partnership Basic Concepts Income and Expenditure Account Based on Trial Balance |