There may be general misunderstanding between people when the things come to the profit. Usually, profit is defined as revenue minus cost, that is, as the price of output times the quantity sold (revenue) minus the cost of producing that quantity of output. However, we need to be a little careful in interpreting that.
Economists understand cost as opportunity cost - the value of the opportunity given up. 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).
Because accountants traditionally considered only money costs, the net of money revenue minus money cost is called “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.
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).
