Table7-1 Accounting Versus Economic Profit for Ruthie’s Gourmet
Soup Company
accounting profits and economic profits are positive (though accounting
profits are larger). Another possibility, however, is that a firm has positive
accounting profits even though it has zero economic profits. If a firm’s
accounting profits represent a return just equal to what is available if the
owner’s capital and time were used elsewhere, then opportunity costs are
just being covered. In this case, there are zero economic profits, even
though the firm’s accountant will record positive profits.
Economic profits are less than accounting profits because of implicit
costs. The table shows a simplified version of a real profit-and-loss
statement. Accounting profits are computed as revenues minus explicit
costs (including depreciation), and in the table are equal to $840 for the
period being examined. When the correct opportunity cost of the owner’s
time (in excess of what is recorded in wages and salaries) and capital are
recognized as implicit costs, the firm appears less profitable. Economic
profits are still positive but equal only $575.