Explain the concept of accounting profit and economic profit with suitable examples.

Profit is the reward to the entrepreneur for organisational and managerial skill — the difference between total revenue and total cost — and it is measured in two ways depending on which costs are deducted: accounting (business) profit and economic (net) profit.

1. Meaning of accounting profit: it is the total revenue minus only the explicit (direct, out-of-pocket) costs of the firm.
2. Formula: Accounting (business) profit = Total revenue − Explicit cost.
3. What it covers: it is the residual left for the owners after paying all purchased factors such as wages, interest, rent and raw materials.
4. Nature: it appears in the firm's books of account, since it counts only actual money payments.
5. Meaning of economic profit: it is the total revenue minus both explicit and implicit costs.
6. Formula: Economic (net) profit = Total revenue − Explicit cost − Implicit cost.
7. Implicit cost: the opportunity cost of the owner's own inputs — for example the salary the owner could have earned elsewhere, or the rent their own building could have fetched.
8. Relationship: economic profit is always less than or equal to accounting profit, because it subtracts implicit costs as well; a firm can show accounting profit yet make zero or negative economic profit.
9. Example: suppose a shop earns revenue of Rs. 10,00,000 and pays explicit costs (wages, rent, materials) of Rs. 7,00,000 — its accounting profit is Rs. 3,00,000. If the owner gave up a Rs. 2,50,000 salary elsewhere (implicit cost), the economic profit is only Rs. 3,00,000 − 2,50,000 = Rs. 50,000.
10. Significance: accountants use accounting profit to report performance, while economists use economic profit to judge whether the business is truly worthwhile compared with the owner's next-best alternative.

Thus, accounting profit counts only explicit costs while economic profit counts both explicit and implicit costs, so economic profit is the more complete measure of whether the entrepreneur's resources are being used in their most valuable way.