# What is the difference between normal profit and economic profit?

Maximizing profit is a goal for all businesses if they aim to keep their doors open, but there are circumstances when even a profitable business might shut down. Different measure

Maximizing profit is a goal for all businesses if they aim to keep their doors open, but there are circumstances when even a profitable business might shut down. Different measures of profit are used to determine short-term and long-term business viability. While most measures of profitability are based on accounting, alternative calculations provide valuable insight into the ability of a company to meet its goals.

## Accounting Profit

Accounting profit is simply the difference between revenue and expenses, according to EconomicConcepts.com. It is the bottom line, the net income, which is the amount left after all costs associated with production, administrative expenses, depreciation, amortization and taxes have been paid. These are explicit costs. Expressed in a formula, accounting profit is:

Revenue - Explicit Expenses = Accounting Profit

Obviously, a company needs a positive net income to survive. Accounting profit, though, doesn't address the question of how profitable a business must be for survival.

## Normal Profit

Normal profit is a concept that takes a different view of an income statement. When calculating the cost of production, an economist assumes that all resources are paid, including the business owner. Natural resources, labor, capital and entrepreneurship are compensated.

In other words, the normal profit includes the implicit costs associated with lost opportunities  the dollar value of the next best alternative for the business owners to employ their time and resources. A normal profit is the amount necessary to compensate the business owners for their services and to keep the business functioning, according to Corporate Finance Institute. The normal profit formula (or economic profit formula) is:

Revenue - Explicit Expenses - Implicit Expenses = Normal Profit

If the amount earned is greater than a normal profit, it is called an economic profit; if less, then it is called an economic loss.

## Accounting Profit, Economic Loss

A business can earn an accounting profit and still incur a economic loss. After adding up all expenses and subtracting them from the sales revenue, the firm might show an accounting profit. But if the business owners could have earned more profit pursuing an alternative venture, then the business could show an economic loss. In this instance, the business owners should consider closing the business and engaging in more profitable ventures.

## Economic Profit

If a company is earning an economic profit in a competitive market, entrepreneurs on the outside will see that profit and be induced to enter the market. Economic profit examples act as green lights for those unsure if an industry will be worthwhile. And when they enter the market, the increased production will force a reduction in prices and shrink the profit to the normal level. In the real world, there is no simple formula that says how much profit a company should make.