<p>Take into account the following identities</p>
<p><span class="math-container">$Economic ~ Cost = Accounting Cost + Opportunity Cost$</span>
<span class="math-container">$Economic~ Profit = Total Revenue - Economic Cost$</span></p>
<p>In your case the opportunity cost is <strong>(10K-5K)</strong> Salary he gave up plus the 10% yield on 100,000 securities. <br />
<em>&quot;10K-5K because he could be earning 10K but now he is earning 5K so he gave up a 5K difference.&quot;</em> <br />
The 10% should be calculated on 100K because, because that is the amount he could have available if he did not start a business and purchase a factory.</p>
<p><span class="math-container">$Economic ~profit = 100,000 - (80,000+5000+10,000) = 5000$</span></p>

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2021-12-16T17:34:08.620Z
2021-12-16T17:34:08.620Z
Macosso
<p>Been trying to calculate economic vs accounting profit as per below but I don't seem to get the correct answer. Any help will be appreciated.</p>
<p>John Smith previously earned £ 10,000 a year in employment and had £ 100,000 invested in government securities, yielding 10% per annum. He sold his securities for £ 100,000 and started his own business. Initially, he rented a factory for £ 5000 per annum, but subsequently purchased
it for £ 20,000, leaving £ 80,000 as the financial capital within the firm.
John Smith’s accountants estimate that total revenue of the firm in the past year was £ 100,000 and total costs were £ 80,000, including a salary of £ 5000 paid to John Smith</p>
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<p><strong>The Economist</strong></p>
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2021-12-16T00:33:31.540Z
Just to add, the Yield(10%) should it consider 100k(Initial Capital) or 80k(meaning after the purchase of the factory)
Crash Bandicoot
<profits>
ECONOMIC VS ACCOUNTIGN PROFIT
Crash Bandicoot
# ECONOMIC VS ACCOUNTIGN PROFIT

(Asked by: username_0 on 2021-12-16)

Been trying to calculate economic vs accounting profit as per below but I don't seem to get the correct answer. Any help will be appreciated.

John Smith previously earned £ 10,000 a year in employment and had £ 100,000 invested in government securities, yielding 10% per annum. He sold his securities for £ 100,000 and started his own business. Initially, he rented a factory for £ 5000 per annum, but subsequently purchased
it for £ 20,000, leaving £ 80,000 as the financial capital within the firm.
John Smith’s accountants estimate that total revenue of the firm in the past year was £ 100,000 and total costs were £ 80,000, including a salary of £ 5000 paid to John Smith

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**The Economist**

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**Tags:** profits

> **Comments:**
> **username_0**: Just to add, the Yield(10%) should it consider 100k(Initial Capital) or 80k(meaning after the purchase of the factory)  

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## 1 answers

### Answer by username_1 on 2021-12-16. Score: 1

Take into account the following identities

$Economic ~ Cost = Accounting Cost + Opportunity Cost$
$Economic~ Profit = Total Revenue - Economic Cost$

In your case the opportunity cost is **(10K-5K)** Salary he gave up plus the 10% yield on 100,000 securities.   
*"10K-5K because he could be earning 10K but now he is earning 5K so he gave up a 5K difference."*   
The 10% should be calculated on 100K because, because that is the amount he could have available if he did not start a business and purchase a factory.

$Economic ~profit = 100,000 - (80,000+5000+10,000) = 5000$


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