Monday, November 10, 2008

Economic Profit (or Loss)

The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. This can be used as another name for "economic value added" (EVA). Don't confuse this with 'accounting profit', which is what most people generally mean when they refer to profit.
In calculating economic profit, opportunity costs are deducted from revenues earned. Opportunity costs are the alternative returns foregone by using the chosen inputs. As a result, you can have a significant accounting profit with little to no economic profit.
For example, say you invest $100,000 to start a business, and in that year you earn $120,000 in profits.
Your accounting profit would be $20,000. However, say that same year you could have earned an income of $45,000 had you been employed? Therefore, you have an economic loss of $25,000 (120,000 - 100,000 - 45,000).
Accounting Profit

A company's total earnings, calculated according to Generally Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business, such as depreciation, interest and taxes.
Accounting profits tend to be higher than economic profits as they omit certain implicit costs, such as opportunity costs.
For example, if you invest $100,000 to start a business and earned $120,000 in profit, your accounting
profit would be $20,000. Economic profit would add implicit costs, such as the opportunity cost of
$50,000 should you have been employed instead during that period. As such, you would have an
economic loss of $30,000 ($120,000 - $100,000 - $50,000)
ACCOUNTING STANDARDS (ASS)


AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occuring after the Balance Sheet Date

AS 5 Net Profit or Loss for the period,Prior Period Items and Changes in Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts (revised 2002)

AS 8 Accounting for Research and Development

AS 9 Revenue Recognition

AS 10 Accounting for Fixed Assets

AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 15 (revised 2005) Employee Benefits

Limited Revision to Accounting Standard (AS) 15, Employee Benefits (revised 2005)

AS 15 (issued 1995)Accounting for Retirement Benefits in the Financial Statement of Employers

AS 16 Borrowing Costs

AS 17 Segment Reporting

AS 18, Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share

AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income.

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions,Contingent` Liabilities and Contingent Assets

AS 30 Financial Instruments: Recognition and Measurement and Limited Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26, AS 27, AS 28 and AS 29

AS 31, Financial Instruments: Presentation