There are two categories of cost. One is the explicit cost and the other is implicit cost. The explicit cost are the cost that can be seen such as wage, supplies, operation costs etc. These cost are used by accountants. Implicit cost are those cost that could have been received if something else was done. For example if you are self-employed then your opportunity to gain income if you worked for another company has been missed. These are form of implicit cost and economics says that it is important to note both type of costs when calculating profit. All types of cost are opportunity costs. (Foldvary, 2012)
When it comes to depreciation, the concept behind it is that not all the value of the purchased asset decrease in one year so they compute the annual cost and make reservations and charge it to the net income on annual basis. In the zero year, the value of the purchase will not be calculated as expenditure but will be recorded into asset side of the balance sheet. So every year the provision that is made in the name of depreciation is in fact the cost charged. "Depreciation is the systematic allocation of the cost of an asset with an economic life in excess of one year. (Moyer, McGuigan, Rao, & Kretlow, 2012)”
"In accounting, profit equals revenues minus explicit costs. In economics, that amount is called an "accounting profit.” But the implicit costs are also real costs, so for economics the accounting profit does not provide the real profit. (Foldvary, 2012)”
Thus according to economics any cost for purchase or exchange should be calculated as real cost while computing the actual profit. In profit and loss statement depreciation is deducted from the Net Income meaning it is considered as explicit cost and so should not be disregarded when computing the cost of capital.
References
Foldvary, F. E. (2012, October 22). What Is Profit? Retrieved from Foundation for Economic Education: fee.org/articles/what-is-profit/
Moyer, C. R., McGuigan, J. R., Rao, R., & Kretlow, W. J. (2012). Contemporary Financial Management. Natorp Boulevard: South-Western, Cengage Learning.
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There are two categories of cost. One is the explicit cost and the other is implicit cost. The explicit cost are the cost that can be seen such as wage, supplies, operation costs etc. These cost are used by accountants. Implicit cost are those cost that could have been received if something else was done. For example if you are self-employed then your opportunity to gain income if you worked for another company has been missed. These are form of implicit cost and economics says that it is important to note both type of costs when calculating profit. All types of cost are opportunity costs. (Foldvary, 2012)
When it comes to depreciation, the concept behind it is that not all the value of the purchased asset decrease in one year so they compute the annual cost and make reservations and charge it to the net income on annual basis. In the zero year, the value of the purchase will not be calculated as expenditure but will be recorded into asset side of the balance sheet. So every year the provision that is made in the name of depreciation is in fact the cost charged. "Depreciation is the systematic allocation of the cost of an asset with an economic life in excess of one year. (Moyer, McGuigan, Rao, & Kretlow, 2012)”
"In accounting, profit equals revenues minus explicit costs. In economics, that amount is called an "accounting profit.” But the implicit costs are also real costs, so for economics the accounting profit does not provide the real profit. (Foldvary, 2012)”
Thus according to economics any cost for purchase or exchange should be calculated as real cost while computing the actual profit. In profit and loss statement depreciation is deducted from the Net Income meaning it is considered as explicit cost and so should not be disregarded when computing the cost of capital.
References
Foldvary, F. E. (2012, October 22). What Is Profit? Retrieved from Foundation for Economic Education: fee.org/articles/what-is-profit/
Moyer, C. R., McGuigan, J. R., Rao, R., & Kretlow, W. J. (2012). Contemporary Financial Management. Natorp Boulevard: South-Western, Cengage Learning.