Cost: Accounting vs. Economics

Accounting Costs vs Economic Costs - Complete Controller

Businesses face several accounting costs that can easily be identified and calculated when conducting business operations. All money coming in and going out must be tracked. 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. This factor is significant for bookkeeping. These different costs and expenses will be explained below. ADP. Payroll – HR – Benefits

Implicit 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

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 defined by their monetary value are included in a business’s accounting costs to identify the net income. Download A Free Financial Toolkit

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 are not concerned that the company could have made $3,000 by leasing the building to some other business – making a total of 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 costs generated from the business operations conducted throughout the financial year.

However, Economic costs are generally considered when a company must make strategic decisions involving opportunity. For example, suppose a company intends to close 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 that might be 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 costs incurred by the business. Any company’s costs in normal, 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 buying the resources the business needs is also known as explicit costs. 

By learning about each specific cost and profit, you and your company will be better prepared for the financial reports and audits. Make sure to keep an eye on economic factors. Many economic costs will not be publicly published. You will have to stay informed!

CorpNet. Start A New Business NowConclusion

In conclusion, while accounting costs are vital for tracking financial performance in business, economic costs play a crucial role in strategic decision-making. Understanding the distinction between implicit and explicit costs empowers businesses to navigate financial complexities effectively. By incorporating accounting and economic perspectives, companies can optimize their operations and adapt to changing market dynamics, ensuring long-term sustainability and success.

Complete Controller. America’s Bookkeeping ExpertsAbout 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.LastPass – Family or Org Password Vault