Which of the following is the equation that best describes the formula needed to calculate accounting profit?

Question

= total revenues – total implicit costs – total explicit costs

= total revenues – total cost

Answer 1

The equation that best describes the formula needed to calculate accounting profit is:

= total revenues – total explicit costs

Accounting profit typically considers only explicit costs (the direct, out-of-pocket expenses), as opposed to implicit costs (the opportunity costs of resources). Therefore, the formula is often simplified to:

Accounting Profit = Total Revenues - Total Explicit Costs.

The option you provided that simplifies to total cost implies that both explicit and implicit costs are included, which pertains more to economic profit rather than accounting profit.