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. Whereas, economic costs are applicable 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 off the building to some other company. The owner could have earned around $3,000 a month from a renter who was commercial. 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 resources that are unused. Explicit costs that have their monetary value defined are included in the accounting costs of a business in order to identify the net income.
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 economic cost details are not needed by the accountant to form an income statement for the company. For instance, accountants have no concern with the fact that the company could have made $3,000 by leasing off 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 gross profit of the company 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, if a company has intended to close down an operational location and rent or lease it out to another business, 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.
In general, economic cost comprises of 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.
Accounting costs, on the other hand, are focused on explicit costs that are incurred by the business. The costs that are incurred by any company 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.