¶ … economic costs are different from accounting costs and why a firm might still operate even when there is a loss.
The best way to describe the differnce between economic costs and accounting costs is to break down the economic costs into explicit and implicit costs. 'Explicit costs" are all of those circumstances that require specific outlay of money such as paying employees, paying rent and utility bills.
"Implicit costs" on the other hand are those opportunities and potential profit or loss that oen may have made hade one gone in another direction, but due to having absorbed oneself in one's present business one had to forego. An example of this may be someone deciding not to look for a conventional job in order to start his own home business over the web. The conventional opportunity may have provided him with a certain profit that he now has to forgo being that he has chosen to sink his time and resources into a different direction. These are the costs that he has given up to pursue the alternative. He used the implicit costs of his time, money, and talents to invest them in his home business.
Accounting costs, on the other hand, look at the tangible profits and losses recorded by the business. Bookkeeping looks at the flow of funds that the business has recorded and is a mathematical enterprise that calculates and summarizes results of the business experience drawing summation and conclusion for government, business and shareholder's purpose as well as for potential investors who would like to know whether or not to invest in this industry. Accounting costs, in other words, focus solely on explicit costs and ignore implicit transactions.
Sometimes, ignoring implicit costs may, in actuality, reveal that the business is losing rather than succeeding. For instance, a person may have invested $55,0000 in an economics course. He dropped out of college (and still ahs the debt) to pursue a business that made a profit at $3,000. The accountant tells him that the bookkeeping shows the business to have been a success. Yet, were implicit costs to have been included, assessment would have concluded that the firm is operating...
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