Question

what are the opportunity costs? Explain why opportunity costs are not recorded in financial accounting systems

Answer 1

Opportunity Costs are the benefits sacrificed by an investor when he rejects a particular alternative for choosing another alternative.

For example:

You have $ 500 which you can invest to earn a 10% return. Whereas you can also use the $ 500 to buy a laptop. Here if you opt to buy a laptop instead of investing, the opportunity cost to you is the missed return of 10% ($50).

The concept of opportunity cost is used in decision making. It is not an actual cost incurred. they do not involve any cash flows. hence they are not recorded in financial accounting.