A Closer look at Accounting Profit

From our discussion of accounting versus economic profit, we know that accounting profit equals total revenue minus total fixed cost and total variable cost.

According to this model, whenever revenues exceed fixed and variable costs, accounting profit will be positive. Most businesspeople refer to such situations as cases where the company is profitable.

If fixed and variable costs exceed revenues, accounting profit is negative. Most businesspeople refer to such situations as cases where the company is losing money.

If fixed and variable costs are equal to revenues, accounting profit is zero. Most businesspeople refer to such situations as cases where the company is breaking even.

Whereas this model can tell us whether accounting profits are positive, negative, or zero, it cannot tell us anything about the opportunity cost associated with these accounting profits because of the alternative use of the resources involved. To do this, we have to revisit economic profit.