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Accounting profit is the net earnings of a business as calculated under Generally Accepted Accounting Principles (GAAP). Accounting profit includes gross revenue minus expenses, but also includes explicit costs of doing business such as interest, taxes and depreciation. Accounting profit is often referred to as financial profit.

Accounting profit is different than economic profit, which also includes opportunity costs and focuses on efficient utilization of assets and recourses. 

For example, Grace has been operating a dress shop for 50 years at the same location. She purchased the land and building for $1,000. Over the years, the area where Grace operates has grown. Grace’s shop now sits on some of the most valuable property in the city. If Grace rented her land, she could make $120,000 per year.

If Grace has $1 million in revenue and $800,000 in operating expenses, her operating profit is $200,000. Subtract depreciation, interest and taxes of $80,000, and Grace has an accounting profit of $120,000.

An economist will add the implicit cost of the forgone rent of $120,000 to the accounting profit calculation and say Grace’s economic profit is zero.

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