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.
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.
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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.