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 huge 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.
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. 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.
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 a business’s accounting costs to identify the net income.
Explicit business costs include the following:
- Salaries, wages, bonuses, commissions, and any other form of compensation dispensed to company employees
- The cost of benefits provided to employees, such as insurance
- Material costs – Refers to any materials that a company must purchase to produce the products and services that it sells
- Marketing and advertising costs
- Rent or mortgage payments on company facilities
- Utilities, such as electricity and internet service
- The costs of purchasing or leasing, and maintaining, equipment that a company requires to operate, such as manufacturing machines or vehicles
- Taxes, insurance, legal fees, etc.
If an accountant or bookkeeper wants to calculate the financial year’s accounting profit, they will only have to look at its profit and 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 $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 the accounting records or bookkeeping of a company. 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 enterprise’s inputs 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 include wages that are given to employees. The money spent on buying the resources needed by the business is also known as explicit costs.While the economic cost may not be included in the company’s bookkeeping and therefore would not be the bookkeeper’s responsibility, it is recommended that you hire an accountant to handle all financial aspects of the company. A certified accountant would manage all financial bookkeeping operations and manage the company’s economic costs. About 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-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure 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.