Explain why accounting profit provides very useful information. Explain why economic profit provides very useful information.

Accounting profit is the difference between a company's total revenue and its explicit costs (i.e., the monetary expenses it incurs in producing its goods or services). It is calculated as follows: Accounting Profit = Total Revenue - Explicit Costs

Economic profit, on the other hand, takes both explicit and implicit costs into account. Implicit costs are the opportunity costs of resources owned by the firm, such as the owner's time and capital investments. Economic profit can be calculated as follows: Economic Profit = Total Revenue - (Explicit Costs + Implicit Costs)

Accounting profit is useful for multiple purposes: a. Performance evaluation: It helps stakeholders, such as shareholders and creditors, assess the company's financial performance and profitability. b. Taxation and legal requirements: Accounting profit is used to calculate taxes owed to the government and meet other legal compliance requirements. c. Decision-making: It serves as a benchmark for managers to make informed decisions, such as whether to continue or discontinue a product line based on its profitability.

Economic profit is useful for the following reasons: a. Better decision-making: By considering opportunity costs, economic profit provides a more comprehensive view of a firm's performance and helps managers make better decisions about allocating resources. b. Evaluating alternatives: Economic profit can be used to compare different business ventures or investments, as it considers both explicit and implicit costs, which helps in determining the most profitable or suitable option. c. Long-term sustainability: A positive economic profit indicates that a firm is generating returns greater than its opportunity costs, which is essential for continued growth and long-term success. In conclusion, both accounting profit and economic profit provide valuable information for businesses and stakeholders in evaluating financial performance, making informed decisions, and ensuring long-term growth and success. Accounting profit is more suitable for meeting legal requirements and benchmarking current financial performance, while economic profit provides a broader understanding of the firm's overall profitability by taking opportunity costs into account.