Accounting costs are the expenses a company pays for economic resources or business inputs, recorded in accounting records to determine profits and value goods. GAAP requires actual cost recording, with permitted inclusions of indirect costs. Capital investment purchases are recorded at historical cost, but GAAP requires depreciation. Economic costs are the sacrifices a business makes in producing goods or services, such as opportunity costs.
An accounting cost is the value paid by a company for economic resources or business inputs. Companies record these costs in their accounting records so that they have an accurate record of how much money has been spent on the resources or inputs needed to generate profits. Accounting costs are also used to determine how companies should value goods and services sold to consumers; firms need to have accurate cost accounting in order to calculate the firm’s expected economic profit margin. While companies may have different methods for pricing goods and services, in the United States, accounting costs are generally recorded in accordance with generally accepted accounting principles (GAAP).
GAAP requires companies to record items purchased for use within the company at the actual cost paid for the item by the company. Companies may be permitted to include acquisition costs not directly related to economic resources or business inputs with accounting costs. Common accounting cost inclusions can be shipping or handling charges, sales tax, handling fees, or other business costs. Companies can include these costs to ensure that all costs of running the business are borne by the consumer. If companies don’t pass these additional business costs on to customers, they can increase their profit margin by pricing individual products to offset those costs.
Firms traditionally record capital investment purchases at historical cost. Capital investment purchases typically represent the major assets used by the firm to produce goods and services; such assets may include buildings, vehicles, equipment or tools used in the company’s business operations. While these items are recorded using historical accounting cost as the baseline value in the accounting ledger, GAAP requires companies to depreciate the value of these items as they are used in the business. Depreciation assures external users of the company’s financial information that the asset value represented in the financial statements is an accurate representation of the business.
Accounting costs are different from economic costs. An economic cost is usually determined as the sacrifice a business has to make in producing goods or services. Economic cost theory is rooted in the economic concept that companies must sacrifice one resource to obtain another. A common term for this economic phenomenon is known as opportunity cost. Examples of opportunity costs can be seen when a business purchases raw materials rather than saving this money in a bank account. Companies forgo the ability to earn interest by saving money by purchasing more economic resources for business operations.
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