Learn something new every day
More Info... by email
An accounting cost is the value paid by a company for economic resources or business inputs. Companies record these costs in their accounting ledgers so they have an accurate record of how much money was spent on the resources or inputs needed to generate profits. Accounting costs are also used to determine how companies should price goods and services sold to consumers; businesses must have an accurate accounting cost in order to calculate the company’s expected economic profit margin. While companies may have different methods for pricing goods and services, in the US, accounting cost is usually recorded according to generally accepted accounting principles (GAAP).
GAAP requires companies to record items purchased for use within the business at the actual cost paid for the item by the company. Companies may be allowed to include acquisition costs not directly related to economic resources or business inputs with the accounting cost. Common accounting cost inclusions may be shipping or freight charges, sales tax, handling fees or other various business costs. Companies may include these costs to ensure that all costs of doing business are passed on to the consumer. If companies do not pass on these additional business costs to customers, they may increase their profit margin when pricing individual products to offset these costs.
Companies traditionally record capital investment purchases at historical cost. Capital investment purchases typically represent major assets used by the company to produce goods and services; these assets may include buildings, vehicles, equipment or tools used in the company’s business operations. While these items are recorded using the historical accounting cost as its base value in the accounting ledger, GAAP requires companies to depreciate the value of these items as they are used in the business. Depreciation ensures external users of the company’s financial information that the asset value represented on financial statements is an accurate representation of the asset.
Accounting cost is different than economic costs. An economic cost is usually determined as the sacrifice a company faces when producing goods or services. The theory of economic costs is rooted in the economic concept that companies must sacrifice one resource in order to gain another. A common term for this economic phenomenon is known as opportunity cost. Examples of opportunity costs may be seen when a company purchases raw materials rather than saving this money in a bank account. Companies forgo the ability to earn interest when saving the money by purchasing more economic resources for business operations.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!