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When we talk about business, there is the least amount of profit required for its survival, which is known as normal profit. In short different disciplines defines profit differently, which one must know while working on profits. In this article excerpt, we have discussed some fundamental differences between accounting, economic and normal profit.
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Definition of Accounting ProfitThe actual profit earned by the company during a particular financial year is known as Accounting Profit. The profit is obtained by deducting the total explicit cost from total revenue. Here explicit cost means the directly ascertainable cost spent on account of running a business, i.e. rent on land and building, the wages of labor, salary for employees, interest on capital invested, etc. The Accounting Profit is also known as net income or the bottom line. It appears in the last line of the income statement, and it is reported at the end of the financial year. This profit is the residual income left for distribution to shareholders of the company. Definition of Economic ProfitEconomic Profit also referred as extra profit or supernormal profit. It is the difference between total revenue earned by the company and the total costs (explicit as well as implicit). Explicit costs as explained above is the operating costs incurred while conducting the business activities. Implicit cost is the opportunity cost, i.e. the option forgone by the firm while investing the money somewhere else or using some other option. Implicit cost is also known as implied or imputed cost. The economic profit is used by the economists to measure the financial position of the company. Along with that, it helps in forecasting the future performance. It works as a yardstick in judging the efficiency and effectiveness of the company’s profitability. Definition of Normal ProfitNormal Profit is the minimum amount of profit required by the entity for its perpetual succession. When the economic profit equals zero (break even point) as a result of the difference between total revenue and total cost, normal profit arises. If the amount is greater (positive value) than zero, then economic profit arises. On the contrary, if the amount is lesser (negative value) than zero, then this is a state of economic loss. Normal Profit equals to the implicit cost (opportunity cost) of the company. When the firm earns a normal profit, it means that it is earning enough earnings (i.e. Having sufficient money to pay off expenses) to keep the business going. It is just a measure used to judge the longevity of the company. Key Differences Between Accounting, Economic and Normal Profit
ConclusionThe whole future of the company depends on its profit earning capacity. If the company earns good profits, then it will give good returns to its stakeholder’s. So, the profits mentioned above are three completely different forms of profit. The analysis of the three will help in knowing about the company’s performance, profitability, future, financial stability and position as well. This would suggest, the stakeholders, whether to invest in the company or not. When the total revenue is than the total cost the level of profit that occurs is a Los?When the total revenue is (one word) than the total cost the level of profit that occurs is a loss. Total revenue minus the implicit and explicit costs of production is profit.
What is meant by normal profit?Normal profit is a profit metric that takes into consideration both explicit and implicit costs. It may be viewed in conjunction with economic profit. Normal profit occurs when the difference between a company's total revenue and combined explicit and implicit costs are equal to zero.
What is normal profit in perfect competition?Normal profit is an economic term that refers to a situation where the total revenues of a company are equal to the total costs in a perfectly competitive market. It means that the company makes sufficient revenues to cover the overall cost of production and remain competitive in its respective industry.
What is economic profit and normal profit?Economic Profit is the remaining surplus left after deducting total costs from total revenue. Normal Profit is the least amount of profit needed for its survival.
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