accounting versus economic profit
Two people can look at the same business and reach opposite verdicts on whether it is 'making money'. The accountant says yes; the economist says no. They are not arguing about the arithmetic — they are counting different costs. The gap between accounting profit and economic profit is one of the most important and most misunderstood ideas in all of economics.
Accounting profit is what most people mean by profit: revenue minus the explicit costs — the actual money that leaves the bank (wages, rent, materials, interest). Economic profit subtracts those same explicit costs and also the implicit costs — the opportunity costs of the resources the owner pours in but does not pay cash for. Chief among these are the salary the owner could have earned working elsewhere and the interest or return their invested money could have earned in its next-best use. So economic profit = revenue - explicit costs - implicit costs, which is always less than, or equal to, accounting profit. Example: a shop earns 200,000 revenue and pays 120,000 in explicit costs, so accounting profit is 80,000. But the owner gave up a 70,000 salary and 15,000 of investment return to run it. Economic profit = 80,000 - 70,000 - 15,000 = -5,000. The books show a profit; economically the owner is 5,000 worse off than their best alternative.
Economic profit is the sharper measure because it answers the real question: is this the best use of the owner's money and time, or could they do better elsewhere? Positive economic profit means yes, stay and even expand; negative means the resources would earn more somewhere else, so consider leaving. This is the engine of the whole market: positive economic profits attract new firms into an industry, which competes the profit away until, in the long run under competition, economic profit falls to zero — a state called normal profit. Crucially, zero economic profit does not mean the owner earns nothing; it means they earn exactly what their resources could have earned elsewhere, no more, no less.
Maya quits a 60,000 job to open a bakery. It brings in 150,000 and her explicit costs (rent, flour, staff) are 100,000, so accounting profit is 50,000. But she gave up the 60,000 salary. Economic profit = 50,000 - 60,000 = -10,000. On paper she profits; economically she is 10,000 worse off than staying employed.
Economic profit also charges the owner for what they gave up — so it is the harder test.
A firm can be profitable on the books yet making an economic loss — perfectly normal and exactly why people sometimes close a 'profitable' shop. Economic profit is not accounting trickery; it just insists you count the opportunity cost of the owner's own resources.