Accounting cost definition
/What is Accounting Cost?
Accounting cost is the recorded cost of an activity. An accounting cost is recorded in the ledgers of a business, so the cost appears in an entity's financial statements. If an accounting cost has not yet been consumed and is equal to or greater than the capitalization limit of a business, the cost is recorded in the balance sheet of the reporting entity as an asset. If an accounting cost has been consumed, the cost is instead recorded in the income statement as an expense. If cash has been expended in association with an accounting cost, the related cash outflow appears in the statement of cash flows.
The scope of an accounting cost can change, depending on the situation. For example, a manager wants to know the accounting cost of a product. If this information is needed for a short-term pricing decision, only the variable costs associated with the product need to be included in the accounting cost. However, if the information is needed to set a long-term price that will cover the company's overhead costs, the scope of the accounting cost will be broadened to include an allocation of fixed costs.
Examples of Accounting Costs
There are numerous examples of accounting costs, of which the following are among the most common:
Salaries and wages. Salaries and wages represent the actual payments made to employees for their services during a given period. These are recorded as expenses in the income statement when incurred, reducing the company's net income.
Depreciation expense. Depreciation is the systematic allocation of the cost of a fixed asset, such as machinery or vehicles, over its useful life. It is recorded periodically as an expense, even though no cash outflow occurs at the time of recognition.
Rent expense. Rent expense is the actual amount paid for the use of property, equipment, or office space. It is recorded as an expense in the period to which it relates, regardless of when the payment is made.
Utilities expense. Utilities expense includes the cost of services like electricity, water, and gas consumed by the business. These costs are recorded based on the usage during the accounting period, even if the payment is made later.
Cost of goods sold (COGS). COGS represents the direct costs of producing goods or purchasing inventory that has been sold during the period. It is recognized as an expense when the related revenue is earned, matching costs with the revenues generated.
Does a Dividend Have an Accounting Cost?
A dividend has no accounting cost, since it is a distribution of earnings to investors. Therefore, it does not appear on the reporting entity’s income statement as an expense. However, it can appear on the entity’s balance sheet as a liability, if the board of directors has declared the dividend but not yet paid it.
Related AccountingTools Courses
How Are Accounting Costs Recorded?
An accounting cost is most typically recorded via the accounts payable system. It can also be recorded through a journal entry for individual transactions, or through the payroll system for compensation-related costs.