Tuesday, April 7, 2009

Calculate Economic and Accounting Profit

How to calculate total accounting and economic profit from simple business example:

Example Accounting Problem:

An entrepreneur currently has an annual salary of $600,000 and wants to start a business on his own.  The persons estimates the total of operating the new business will be about $250,000 per year.The potential revenue is estimated as $800,000 per year.

1. Calculate total accounting profit.
2. calculate total economic profit.

Accounting Answers:

1. Calculate total accounting profit. 800,000 - 250,000 = 550,000
2. Calculate total economic profit. 550,000 - 600,000 = -50,000

After looking at the total economic profit, the entrepreneur would be better staying with his current job if money is all the he cares about.

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