The Comparison Between Accounting Costs vs. Economic Costs

Accounting Costs vs. Economic Costs - Complete Controller

Businesses face several accounting costs when conducting day-to-day business operations that can easily be identified and calculated. Companies, however, also face other costs known as 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 external and internal reports of the company. At the same time, economic costs apply to the internal sector only.

Implicit Costs

Economic costs reflect both the implicit and explicit costs of a company that are encountered during the year. Implicit costs are linked to resources that are offered to a company without any price tag. If a company, for instance, is operational from a building that it owns, it encounters an implicit cost due to the rent that could have been earned by leasing the building to some other company. ADP. Payroll – HR – Benefits

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

Explicit Costs

Accounting costs are generated from the overall explicit costs of a business throughout the fiscal year. They do not include the implicit costs coming from unused resources. Explicit costs that have their monetary value defined are included in the accounting costs of a business to identify the net income.

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. LasPass – Family or Org Password Vault

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 costs generated from the business operations conducted throughout the financial year.

Economic costs, however, are generally considered when a company has to make strategic decisions that involve 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.

In general, economic cost comprises the monetary value of resources employed by the business. Also, it links to the opportunity cost that arises from the inputs used by the enterprise to make the business functional. Exit Advisor

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

Conclusion

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

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