OPPORTUNITY COST FUNDAMENTAL COST PRINCIPLE IN ECONOMICS MEASURES COSTS IN TERMS OF OPPORTUNITIES FOREGONE (i.e. THE NEXT BEST OPPORTUNITY) LEADS TO NOTION OF IMPLICIT COST ACCOUNTANCY MEASURES EXPLICIT COSTS ECONOMICS MEASURES BOTH EXPLICIT AND IMPLICIT COSTS

IMPLICIT COSTS Implicit costs apply to factors of production - in small businesses where owner is principal worker, labour may no be properly costed - land such as office space also has an opportunity cost - owner capital has an opportunity cost as the interest rate foregone on investment - enterprise has an opportunity cost which in economics is measured as normal profits So from this perspective normal profits represents a legitimate cost of business

ACCOUNTANCY MEASUREMENTS Historic Cost Accounting - based on original cost values Current Cost Accounting - based on replacement values Historic cost still dominates accountancy profession - not suitable in times of inflation

CREATIVE ACCOUNTING PRE-ACQUISITION WRITE DOWN DISPOSALS DEFERRED CONSIDERATION EXTRAORDINARY AND EXCEPTIONAL ITEMS OFF BALANCE SHEET FINANCE CONTINGENT LIABILITIES CAPITALISATION OF COSTS BRAND ACCOUNTING CHANGES IN DEPRECIATION POLICY CONVERTIBLE AND PUT OPTIONS PENSION FUND SURPLUS CURRENCY MISMATCHING

DEPRECIATION AND STOCKS IN ACCOUNTING, DEPRECIATION IS BASED ON THE HISTORIC COST VALUE OF AN ASSET IN ECONOMICS, DEPRECIATION IS BASED ON THE EXPECTED FUTURE EARNING POWER OF AN ASSET ACCOUNTANCY TENDS TO USE EITHER THE LIFO OR THE FIFO METHODS OF VALUING STOCKS NEITHER METHOD WILL BE ACCURATE IN TIMES OF INFLATION ECONOMICS WOULD SUGGEST A SYSTEM OF CONSTANT COST (RATHER THAN CURRENT VALUES) AS MORE APPROPRIATE

GOODWILL AND EXTERNALITIES GOODWILL CONCEPT MUCH WIDER IN ECONOMICS THAN ACCOUNTING EXTERNAL ECONOMIES OF SCALE EXTERNAL DISECONOMIES OF SCALE -Tend to be ignored in terms of conventional accounting IN ECONOMICS A TECHNIQUE CALLED COST BENEFIT ANALYSIS IS USED

PROFITS Profits as a residual Normal and supernormal profits Economic rent and monopoly profits Reward for innovation and risk Profit as exploitation NEED FOR LIMITATION ON PROFITS

MEASUREMENT OF PROFITS ABSOLUTE GROSS PROFITS (BEFORE TAX) NET PROFITS (AFTER TAX) NET PROFITS (AFTER INTEREST DEEDUCTIONS) DISTRIBUTED AND UNDISTRIBUTED PROFITS SOCIAL PROFITS RELATIVE PROFITS AS % OF CAPITAL EMPLOYED PROFITS AS % OF SHAREHOLDERS' EQUITY PROFITS AS % OF GROSS TURNOVER