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Two kinds of profit

Usually when an accountant is balancing the books he or she calculates all the expenses and revenue, and if the company is working well, declares a profit. However, expenses may be a tricky thing to calculate precisely. Economists working in microeconomics stress that a company which wants to work really well must take into account not only the obvious, so called accountancy expenses, but also the alternative ones. In spite of these, two kinds of profit may be calculated, and one of them may not be a profit at all.

The nature of expenses is twofold. The first kind is called accountancy expenses, these are generally related to money. Money that is spent for salaries, raw materials, energy, payment of interests, taxes and so on. They are clearly seen, expletive and recorded in the books.

The other kind of expenses is less obvious. When economists assess the expenses, they have to take into account the limitations of resources and alternatives of their use. If the resources are used to produce one kind of commodity, which means that they are not available for the other one. Alternative expenses are the profit lost. They come in handy when one wants to calculate the chosen utilization of resources with the one which was cast-off. The alternative expenses are implicit – supposed and silent.

Therefore, when calculating the whole spectrum of expenses a company should integrate both: expletive and implicit expenses. The sum of them are the economic expenses. The size of which should not be higher than the revenue for the business subject to continue its activity in the market.

In the most general sense, profit is a difference between common revenue and expenses. However, because there are two kinds of expenses, there is no unambiguous category of profit.

The first and most commonly used category of profit is called balance profit. When the common expenses are subtracted from the common revenue.

However, if a company wants to calculate a more truthful account of its activity it may want to subtract the economic expenses. In that case it may realize that it still operates profitably (now it could be called an economic profit), or it may be balancing near a zero (which is still a good option in today’s economy), or it will recognize that the company is going downhill and working wastefully.

EBN reporter Edgaras Savickas