accounting profit

Examples of accounting profit in the following topics:

• Difference Between Economic and Accounting Profit

  • The accounting profit would be $40,000 ($100,000 in revenue - $60,000 in explicit costs).
  • In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit.
  • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
  • Accounting profit is also limited in its time scope; generally, accounting profit only considers the costs and revenue of a single period of time, such as a fiscal quarter or year.
  • Economic profit also accounts for a longer span of time than accounting profit.

• Sources and Determinants of Profit

  • Consequently, the firm earns $25,000 in economic profit.
  • In contrast, accounting profit is the difference between total revenue and explicit costs- it does not take opportunity costs into consideration, and is generally higher than economic profit.
  • Economic profits may be positive, zero, or negative.
  • An economic profit of zero is also known as a normal profit.
  • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

• The Financial Account

  • When financial account has a positive balance, we say that there is a financial account surplus.
  • Likewise, we say that there is a financial account deficit when the financial account has a negative balance.
  • After the initial investment, any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account rather than the financial account .
  • Such intervention affects the financial account.
  • This contributes to a financial account surplus.

• Production Outputs

  • Production outputs can be anything from crops to technological devices to accounting services.
  • Microeconomics assumes that firms and businesses are profit-seeking.
  • Economic Profit: The firm's average total cost is less than the price of each additional product at the profit-maximizing output.
  • Normal Profit: The average total cost equals the price at the profit-maximizing output.
  • In this case, the economic profit equals zero.

• Cost

  • Profits (Π) are defined as the difference between the total revenue (TR) and the total cost (TC).
  • If the entrepreneur is not earning a "normal profit" is some activity they will seek other opportunities.
  • The normal profit is determined by the market and is considered a cost.
  • It is often the job of economists and accountants to estimate implicit costs and express them in monetary terms.
  • A "normal profit" is an example of an implicit cost of engaging in a business activity.

• Short Run Firm Production Decision

  • However, variable costs and revenues affect short run profits.
  • In the short run, a firm that is maximizing its profits will:
  • The firm will also take adjustments into account that can disturb equilibrium such as the sales tax rate.
  • The goal of a firm is to maximize profits by minimizing losses.

• Market Strategies

  • Congress, the federal government's General Accounting Office said that in the worst 20-year period since 1926, stock prices increased 3 percent.
  • If the price of stock bought on margin rises, these investors can sell the stock, repay their brokers the borrowed amount plus interest and commissions, and still make a profit.
  • If the price goes down, however, brokers issue "margin calls," forcing the investors to pay additional money into their accounts so that their loans still equal no more than half of the value of the stock.
  • If their investment decisions are correct, speculators can make a greater profit, but if they are misjudge the market, they can suffer bigger losses.
  • Much like short selling, put options enable traders to profit from a declining market.

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • Profit maximization is the short run or long run process that a firm uses to determine the price and output level that returns the greatest profit when producing a good or service.
  • When a table of costs and revenues is available, a firm can plot the data onto a profit curve.
  • The profit maximizing output is the one at which the profit reaches its maximum .
  • Profit maximization is directly impacts the supply and demand of a product.

• Defining Capital

  • Capital goods are used in the production process and may depreciated through accounting practice to incorporate utilization, though they are not consumed.
  • Capital is directly impacted by both interest and profit.
  • Profit is the accumulation of capital, which is the driving force behind economic activity.
  • Interest allows capital to be obtained, while profit is the accumulation of the capital.

• Reasons for Efficiency Loss

  • Market failure occurs when the price mechanism fails to take into account all of the costs and/or benefits of providing and consuming a good.
  • A monopoly is an imperfect market that restricts output in an attempt to maximize profit .
  • The gray box illustrates the abnormal profit, although the firm could easily be losing money.
  • A monopoly is an imperfect market that restricts the output in an attempt to maximize its profits.