Accounting vs. Economic Profit: like the Tailor Says, "The 'Bottom Line' Doesn't Tell the Whole Story"

If we were to ask most managers, including business owners, for a simple statement of accounting profit, they would probably tell us that accounting profit is equal to total revenue minus total cost. Total cost is commonly arranged into total fixed cost and total variable cost.

Economic profit can also be written as total revenue minus total cost. But, from an economic perspective, total cost is arranged into total fixed cost, total variable cost, and opportunity cost.

The only reason accountants do not include opportunity cost in their model is that they are forbidden to do so by statutory mandate. They are as knowledgeable about opportunity cost as economists. However, as recorders of the company's previous business activities (historians), they are forbidden by law to include opportunity cost as a cost of doing business.