What is the difference between accounting and economic profit?

Accounting profit = Revenue − Explicit Costs (what traditional financial statements show). Economic profit = Revenue − Explicit Costs − Implicit Costs (includes opportunity costs). Economic profit is always ≤ accounting profit.

What counts as an implicit cost?

Any resource used without direct payment: owner's time (could earn salary elsewhere), invested capital (could earn market returns), use of personal property (could charge rent), and forgone benefits (health insurance, retirement matching from an employer).

What market return rate should I use?

The S&P 500 has averaged ~10% annually over the long term. For risk-adjusted comparison, use the return on an investment with similar risk to your business. Higher-risk businesses should use 12-15%. Risk-free investors might use 4-5%.

Can economic profit be negative while accounting profit is positive?

Yes, this is common for small businesses. A business with $80K accounting profit but $100K in implicit costs has -$20K economic profit. It's "profitable" on paper but the owner would be better off working elsewhere and investing their capital.

How does economic profit relate to EVA?

Economic Value Added (EVA) is a corporate finance metric based on the same principle: NOPAT − (Capital × WACC). It measures whether a company earns returns above its cost of capital. EVA is economic profit applied at the corporate level.

Should I close my business if economic profit is negative?

Not necessarily. Consider: Is the trend improving? Are you building equity/goodwill? Do you value non-financial benefits (flexibility, purpose)? But persistent negative economic profit means you're subsidizing the business with below-market compensation.

Economic Profit Calculator

Calculate economic profit by subtracting both explicit and implicit (opportunity) costs from revenue. Compare accounting vs economic profit and assess value creation.

Total Revenue ($)

Total Explicit Costs ($)

Owner's Forgone Salary ($)

Capital Invested ($)

Market Return Rate (%)

Other Implicit Costs ($)

Accounting Profit

$150,000.00

Margin: 30.0% — revenue minus explicit costs only

Economic Profit

$50,000.00

Margin: 10.0% — includes opportunity costs

Difference

$100,000.00

What opportunity costs hide from your books

Total Implicit Costs

$100,000.00

Salary $80,000.00 + Capital $20,000.00

Capital Opportunity Cost

$20,000.00

10% return on $200,000.00

Actual ROI on Capital

75.0%

+65.0% above market return

Break-Even Revenue

$450,000.00

Revenue needed for zero economic profit

Verdict

✅ Creating Value

Business earns above opportunity cost

Profit Comparison

Accounting Profit

$150,000.00

Economic Profit

$50,000.00

Market Return Rate Sensitivity

Market Rate	Capital Op. Cost	Economic Profit	Verdict
5%	$10,000.00	$60,000.00	✅ Value
7%	$14,000.00	$56,000.00	✅ Value
8%	$16,000.00	$54,000.00	✅ Value
10%	$20,000.00	$50,000.00	✅ Value
12%	$24,000.00	$46,000.00	✅ Value
15%	$30,000.00	$40,000.00	✅ Value

Planning notes, formulas, and examples

About the Economic Profit Calculator

Economic profit goes beyond accounting profit by including implicit costs — the opportunity costs of resources the business uses but doesn't directly pay for. While traditional accounting profit only subtracts explicit costs (rent, salaries, materials), economic profit also deducts the owner's forgone salary from alternative employment and the return that invested capital could earn elsewhere. A business can show a healthy accounting profit while actually destroying economic value.

Consider a doctor who quits a $200,000 salary to open a practice investing $500,000. If the practice earns $250,000 in accounting profit, it looks profitable. But after deducting the $200,000 forgone salary and $50,000 the capital could earn (at 10% market return), economic profit is zero. The doctor is no better off than being an employee with money in the stock market.

This calculator computes both accounting and economic profit side-by-side, quantifies your opportunity costs, and tells you whether your business is truly creating value above what your time and capital could earn elsewhere. The sensitivity table shows how different market return assumptions affect the verdict.

When This Page Helps

Accounting profit can be misleading. Economic profit tells you whether your business truly earns more than your time and capital could make elsewhere. It's the honest answer to "Am I better off running this business or working for someone else?" Use it when you want to pressure-test a business against realistic alternatives: a salaried job, a passive investment return, or a different use of the same capital. It is most useful for owner-operated businesses where the owner’s labor and cash are both committed and should be priced like real inputs.

How to Use the Inputs

Enter total revenue from the business
Enter all explicit costs (what you actually pay)
Enter the salary you could earn in alternative employment
Enter total capital invested in the business
Set the expected market return rate (S&P 500 averages ~10%)
Add any other implicit costs not captured above
Review accounting vs economic profit comparison

Formula used

Accounting Profit = Revenue − Explicit Costs
Implicit Costs = Forgone Salary + (Capital × Market Return Rate) + Other
Economic Profit = Revenue − Explicit Costs − Implicit Costs
 = Accounting Profit − Implicit Costs
Value Creation: Economic Profit > 0 means business exceeds opportunity cost

Example Calculation

Result: Accounting profit $150K — Economic profit $50K — creating value

Revenue $500K − explicit costs $350K = $150K accounting profit. Implicit costs: $80K forgone salary + $20K capital opportunity (10% × $200K) = $100K. Economic profit = $150K − $100K = $50K. The business earns $50K above what the owner's time and money could earn elsewhere.

Tips & Best Practices

Include ALL forgone income — salary, benefits, retirement matching, stock options you gave up
Use 10% market return as baseline — adjust up for private business risk premium
If economic profit is negative, either grow revenue, cut costs, or reduce capital invested
Track economic profit quarterly — it reveals true performance better than accounting profit
Young businesses often have negative economic profit while building — but should trend positive within 3-5 years

What The Result Means

Economic profit subtracts opportunity cost from accounting profit. A positive result means the business covers both explicit expenses and the value of the owner’s time and capital; a negative result means the business may be profitable on paper but still underperforming compared with the next-best use of those resources.

Choosing Inputs

Use a realistic forgone salary, not a token figure, and include the return your invested capital could earn outside the business. If the business uses personal property, unpaid family labor, or benefits you gave up, those should be treated as implicit costs too.

Interpreting A Negative Result

A negative economic profit is not automatically a reason to shut down, but it is a sign to compare alternatives honestly. Check whether the result is temporary because the business is still ramping up, or structural because the margin and capital intensity are too low to justify the effort.

Sources & Methodology

Last updated: March 29, 2026

Methodology

This page compares accounting profit with a simplified economic-profit view by subtracting both explicit costs and user-entered opportunity costs. It calculates accounting profit as `revenue - explicit costs`, then estimates implicit costs as forgone salary plus capital invested multiplied by the chosen market-return assumption, plus any other entered implicit costs. Economic profit is accounting profit minus those implicit costs.

The result is an owner-level opportunity-cost worksheet, not a GAAP measure or a formal EVA implementation. It does not model taxes on opportunity returns, risk-adjusted hurdle rates, or company-level NOPAT and invested-capital adjustments unless the user approximates them manually through the inputs.

Sources

7.1 Explicit and Implicit Costs, and Accounting and Economic Profit (OpenStax Principles of Economics 2e) — Reference distinguishing accounting profit from economic profit by including implicit and opportunity costs.
12.3 Evaluate an Operating Segment or a Project Using Return on Investment, Residual Income, and Economic Value Added (OpenStax Principles of Accounting, Volume 2) — Background on value-creation concepts such as economic value added and capital charges, which relate to the page's opportunity-cost framing.

Frequently Asked Questions

Accounting profit = Revenue − Explicit Costs (what traditional financial statements show). Economic profit = Revenue − Explicit Costs − Implicit Costs (includes opportunity costs). Economic profit is always ≤ accounting profit.