Economics uses as slightly different standard of cost, variable and fixed costs and even profit then the accounting profession does. How does economics view these critical issues in any organization? Does this help explain why some businesses stay open 24 hours even though there are few customers after 12:00?
Accounting and Economics are terms that many people confuse. DifferenceBetween.com list these factors as the key differences between the terms:
“1. Accounting utilizes certain principles to support its actions, while economics makes
use of assumptions that will tend to make certain situations simpler.
2. Accounting prepares, analyzes and understands financial statements, whereas economic studies the production, consumption, and even the distribution, of certain goods and services.” (1)
Basically stating that the accounting method is looking at the financial aspect in terms that have been long used and universal looking at basic costs of doing business. Whereas economics is a more scientific view of the concepts and costs of doing business looking at scarcity of items and production aspects and is a relatively newer aspect then that of accounting.
When accountants look at profit they take the cost of doing business less the total revenue. The cost for them is the fixed and variable costs totaled. A fixed cost does not change whether there is an increase or decrease in the quantity of goods and services produced. A variable cost is a type of cost that changes when there is a rise and fall in a company’s production volume. This is what we call the explicit costs. They subtract that from all the money made and that is the profit the business is making from an accounting point of view.
Economist will tell you that you are missing a key component at figuring the actual profit the business is making by not including the implicit costs. To figure the profits of the business in economics total revenues subtract both explicit (just like in accounting) and implicit costs. So what are implicit costs you ask? Well they are simply the value of the resources used in gaining the profit from the business if applied somewhere else in the market instead. Investopedia describes it as: “cost that is represented by lost opportunity in the use of a company's own resources, excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision, such as the loss of interest income on funds, or depreciation of machinery used for a capital project.” (2) So, for economist to figure a profit to the business they figure in the accounting costs and the implicit costs. Examples of this might be the cost of the owner devoting time to the business operations instead of expansion. The cost associated with the business owner operating to get the accounting...