<p>Entrepreneur's wages are his return from his investment (his labour, leisure time, etc.) and his current wages are implicit costs. You need to be able to differentiate between accounting and economic profits to understand why this is so. This can be explained with an example. </p>

<p>Assume that you currently work for a dentistry. You are now considering operning your own practice. You may earn 100,000 per year as an entrepreneur. The running business costs are, say, 40,000.</p>

<p>Step 1. <strong>Calculate Explicit costs.</strong> 
Explicit costs: rental, utility, admin etc. costs = 40,000.</p>

<p>Step 2. <strong>Accounting profit</strong>. Accounting profit = Revenues−Explicit costs = 100,000 - 40,000 = 60,000. Looks good!
​​
But these calculations consider only the explicit costs. Since running your practice means leaving your current job where you are earning $40,000, your current earnings will be opportunity costs or things that you sacrifice to get the next best alternative. Thus, your current salary is an implicit cost to your business. You will compare implicit costs and potential profit from the new business (your net earnings from the new business).</p>

<p>Step 3. You need to subtract both the explicit and implicit costs to determine the true <strong>economic profit</strong>: 60,000 - 40,000 = 20,000. </p>

<p>Note that, here, your wages are not explicit costs; as the owner of the business you are receiving return on your investment in the form of wages.</p>

CC BY-SA 3.0
2018-01-04T11:37:27.953Z
I understand, but his CURRENT wage as an entrepreneur was neither included in explicit costs nor implicit ones. Although his old wage was included in implicit costs.
KarmaPeasant
CC BY-SA 3.0
2018-01-04T12:00:12.337Z
@user161005, updated my answer and also included the missing words.
london
CC BY-SA 3.0
2018-01-04T12:05:33.990Z
Let's remember word "accounting profit". Accountants don't count implicit costs. But would an accountant count the current wage of the business owner? It seems so. So his current wage, by this logic, can't be included in implicit costs.
KarmaPeasant
CC BY-SA 3.0
2018-01-04T12:16:19.090Z
Yes, for reporting purses i.e taxation, P&L account etc., you include the owner's wages in explicit costs. However, in the present context, forgone wages are considered as opportunity costs (implicit costs) and entrepreneur's wages are return on his investment. The latter are not explicit costs, in the present context. From an accountant's perspecetive, they are business costs and are recorded in P&L accounts.
london
CC BY-SA 3.0
2018-01-04T12:27:14.177Z
"The latter are not explicit costs" So his current wage (as a business owner) is neither explicit nor implicit cost, right?
KarmaPeasant
CC BY-SA 3.0
2018-01-04T12:32:40.153Z
Yes, by current wages I mean his wages from employment. These wages are implicit costs for him as these are considered to be opportunity cost once he starts his own business. His wages from his new business as a director-owner are neither explicit nor implicit costs (in the present context), they are return on his investment. However, for accounting purposes these wages are recorded as operating expenses.
london
CC BY-SA 3.0
2018-01-04T12:46:20.440Z
"His wages from his new business as a director-owner are neither explicit nor implicit costs (in the present context)" Does it mean that if he increased his wage both accounting profit and economic profit would remain the same? Given that accounting profit=TR - explicit costs, economic profit = accounting profit - implicit costs.
KarmaPeasant
CC BY-SA 3.0
2018-01-04T13:15:22.780Z
Economic profit does not change because, it is ultimately what he gets in the end - return on inevestment whether he receives it in the form of wages or profits (in the absence of taxes). From an economist's perspective, nothing changes. His accounting profit from accountant's perspective changes, his profit declines due to increase in operating expenses (wages).
london
CC BY-SA 3.0
2018-01-04T11:21:42.647Z
2018-01-04T11:59:16.360Z
2018-01-04T11:59:16.360Z
london
<p>I was solving an economic problem (I was calculating explicit and implicit costs) and noticed one interesting thing:
In the said problem, the entrepreneur set himself the wage of 10 000 rubles AND in the solution said wage was NOT included in explicit costs. But his old wage (before he started his own business) was included in implicit costs(By the way, his old wage was 12 000 rubles).
This puzzles me because although he owns the business, he's also its employee. And if he is his own employee, his wage must be accounted as a wage of any other employee. I don't think that an accountant would make an exception for him. Besides, if he decreased his own wage, then expenses of his business would decrease and consequently, its profit would increase.</p>

<microeconomics><accounting><profits>
Why wasn't the wage of the entrepreneur included in explicit costs?
KarmaPeasant
# Why wasn't the wage of the entrepreneur included in explicit costs?

(Asked by: username_0 on 2018-01-04)

I was solving an economic problem (I was calculating explicit and implicit costs) and noticed one interesting thing:
In the said problem, the entrepreneur set himself the wage of 10 000 rubles AND in the solution said wage was NOT included in explicit costs. But his old wage (before he started his own business) was included in implicit costs(By the way, his old wage was 12 000 rubles).
This puzzles me because although he owns the business, he's also its employee. And if he is his own employee, his wage must be accounted as a wage of any other employee. I don't think that an accountant would make an exception for him. Besides, if he decreased his own wage, then expenses of his business would decrease and consequently, its profit would increase.

**Tags:** microeconomics, accounting, profits


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## 1 answers

### Answer by username_1 on 2018-01-04. Score: 0 | Accepted answer

Entrepreneur's wages are his return from his investment (his labour, leisure time, etc.) and his current wages are implicit costs. You need to be able to differentiate between accounting and economic profits to understand why this is so. This can be explained with an example.

Assume that you currently work for a dentistry. You are now considering operning your own practice. You may earn 100,000 per year as an entrepreneur. The running business costs are, say, 40,000.

Step 1. **Calculate Explicit costs.**
Explicit costs: rental, utility, admin etc. costs = 40,000.

Step 2. **Accounting profit**. Accounting profit = Revenues−Explicit costs = 100,000 - 40,000 = 60,000. Looks good!
​​
But these calculations consider only the explicit costs. Since running your practice means leaving your current job where you are earning $40,000, your current earnings will be opportunity costs or things that you sacrifice to get the next best alternative. Thus, your current salary is an implicit cost to your business. You will compare implicit costs and potential profit from the new business (your net earnings from the new business).

Step 3. You need to subtract both the explicit and implicit costs to determine the true **economic profit**: 60,000 - 40,000 = 20,000.

Note that, here, your wages are not explicit costs; as the owner of the business you are receiving return on your investment in the form of wages.

> **Comments:**
> **username_0**: I understand, but his CURRENT wage as an entrepreneur was neither included in explicit costs nor implicit ones. Although his old wage was included in implicit costs.  
> **username_1**: @user161005, updated my answer and also included the missing words.  
> **username_0**: Let's remember word "accounting profit". Accountants don't count implicit costs. But would an accountant count the current wage of the business owner? It seems so. So his current wage, by this logic, can't be included in implicit costs.  
> **username_1**: Yes, for reporting purses i.e taxation, P&L account etc., you include the owner's wages in explicit costs. However, in the present context, forgone wages are considered as opportunity costs (implicit costs) and entrepreneur's wages are return on his investment. The latter are not explicit costs, in the present context. From an accountant's perspecetive, they are business costs and are recorded in P&L accounts.  
> **username_0**: "The latter are not explicit costs" So his current wage (as a business owner) is neither explicit nor implicit cost, right?  
> **username_1**: Yes, by current wages I mean his wages from employment. These wages are implicit costs for him as these are considered to be opportunity cost once he starts his own business. His wages from his new business as a director-owner are neither explicit nor implicit costs (in the present context), they are return on his investment. However, for accounting purposes these wages are recorded as operating expenses.  
> **username_0**: "His wages from his new business as a director-owner are neither explicit nor implicit costs (in the present context)" Does it mean that if he increased his wage both accounting profit and economic profit would remain the same? Given that accounting profit=TR - explicit costs, economic profit = accounting profit - implicit costs.  
> **username_1**: Economic profit does not change because, it is ultimately what he gets in the end - return on inevestment whether he receives it in the form of wages or profits (in the absence of taxes). From an economist's perspective, nothing changes. His accounting profit from accountant's perspective changes, his profit declines due to increase in operating expenses (wages).  

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