Chapter 11, Problem 1QE

To determine

To identify: Costs and revenues that are not included in profit calculation by accountants.

Explanation of Solution

Implicit costs: Every expense that has already happened and is not reported as a distinct expenditure is considered an implicit cost. It is an opportunity cost that develops whenever a corporation devotes available resources to a program without receiving any clear reward for doing so. This indicates that when a corporation distributes its resources, it always foregoes the opportunity to gain revenue from using those resources somewhere else, resulting in no financial exchange.

Implicit revenue: Changes in the amount of property that is not easily noticeable and documented generate this form of income. Revenue that is not obtained through activities like production is referred to as implicit revenue.

The expense and income which can be explicitly indicated in the accounting records are the priority of accountants. When estimating the entire cost, an accountant considers salary, rental expenses, and interest paid to creditors, as well as payments made to other components of the manufacturing process. When calculating total income, explicit revenues are considered. Accountants only consider explicit cost and revenue for the calculation of accounting profit. On the other hand, economist includes implicit cost and revenue for the calculation of economic profit. An example of cost is the opportunity cost of time and capital invested by the owner. An example of revenue is the increase in the value of assets owned.

Economics Concept Introduction

Introduction:

Profit: Any money produced out of a commercial activity surpasses the expenditures, charges, and taxes associated with maintaining the activity in question, profit is earned. Profits are returned to businessmen, who can choose to take the money or reinvest the money into the company. Entire revenue is subtracted from total expenditures to arrive at a profit.