Some Issues in the Measurement of Profit Accountants versus Economists

Abstract

This paper discusses a topic rarely addressed in the literature on profit theory over the decades. In empirical work on subjects like growth, efficiency and welfare in mainstream or Islamic economics business profits at times appear as one of the determinants. Such studies perforce use profit data reported in the accounting records. This data is invariably at variance in important ways with the economists’ theoretical view of profit. The cause of divergence is the cosmopolitan forward looking ex ante view of entrepreneurism the economists take in the matter as opposed to the narrow conservative ex post focus of the accountants needed to protect the interest of business proprietors who pay them for the job. There is a need to narrow this gap to improve the results of empirical explorations. This paper identifies and examines some issues like maintenance of capital, evaluation of inventories and the impact of conservatism as causes of divergence as focal points for reducing the gap. It concludes that the economists are obliged more to take cognizance of accounting compulsions than the other way round in the reconciliation process.