Costs: Accounting vs Economic

Accounting Costs vs. Economic Costs - Complete Controller

Businesses face several accounting costs that can easily be identified and calculated when conducting day-to-day business operations. Companies, however, also face other economic costs that are not displayed on the bookkeeping records and have a significant impact on the decisions made by management. Accounting costs are crucial for the company’s external and internal reports. At the same time, economic costs apply to the internal sector only.

Cubicle to Cloud virtual businessImplicit Costs

Economic costs reflect a company’s implicit and explicit costs during the year. Implicit costs are linked to resources offered to a company without any price tag. If a company, for instance, operates from a building it owns, it encounters an implicit cost due to the rent that could have been earned by leasing the building to some other company.

The owner could have earned around $3,000 monthly from a commercial renter. Therefore, in this case, the company faces an implicit cost of $3,000, referred to as its economic cost.

Explicit Costs

Explicit costs constitute a vital component of a company’s accounting framework over the fiscal year. These costs, characterized by their clearly defined monetary value, form an integral part of a business’s accounting costs, aiding in determining net income. It is crucial to note that accounting costs specifically encompass explicit costs, excluding implicit costs arising from underutilized resources.

Explicit costs are tangible, measurable expenditures incurred during the regular course of business operations. These may include direct expenses like employee wages, utility bills, or the purchase of raw materials. By focusing on these quantifiable elements, accounting professionals can precisely calculate the company’s financial performance.Complete Controller. America’s Bookkeeping Experts

Accounting Profit

If an accountant or bookkeeper wants to calculate the accounting profit of the financial year, they will only have to look at the profit of the company and its accounting costs. The accountant does not need the economic cost details to form an income statement for the company.

For instance, accountants have no concern that the company could have made $3,000 by leasing the building to some other business, making around $36,000 during the financial year. This figure of $36,000 has nothing to do with the company’s gross profit during the financial year.

Economic Costs are Not Included in Bookkeeping

Economic costs are not written or mentioned in a company’s accounting records or bookkeeping. When creating financial reports, accountants are focused on the explicit expenses generated from the business operations conducted throughout the financial year.

However, Economic costs are generally considered when a company has to make strategic decisions involving opportunity. For example, suppose a company has intended to close down an operational location and rent or lease it out to another business. In that case, the company needs to consider the economic costs of losing the money generated from business operations or the profit generated from the rent.

Economic cost generally comprises the monetary value of resources the business employs. Also, it links to the opportunity cost that arises from the inputs used by the enterprise to make the business functional.

On the other hand, accounting costs are focused on explicit expenses incurred by the business. Any company’s expenditures in routine, day-to-day market transactions are referred to as explicit costs. One typical example of explicit costs includes wages that are given to employees. The money spent buying the resources the business needs is also known as explicit costs.

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You must understand the difference between accounting costs and economic costs. You need to understand the difference between what one has to do with your accounting system and what does not. Whether you take care of the accounting and bookkeeping personally or hire a professional to do it, it is crucial that you still understand all aspects of your business’s finances. Only when you know your business’s finances can you expect to be successful.

LastPass – Family or Org Password VaultAbout Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.ADP. Payroll – HR – Benefits