Question

An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called?

1) Opportunity cost
2) Loss of revenue
3) Interest expense
4) Discount expense

Answer 1

An expense from not taking advantage of cash discounts in the net method of recording purchases is called a discount expense, which is conceptually related to the economic principle of opportunity cost.

Step-by-step explanation:

An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called a discount expense. The net method assumes that discounts for early payment are taken. If the discount is not taken, the company effectively has a higher expense because they are paying more for the goods than they would have if they had taken advantage of the discount. This is akin to the opportunity cost in economics, wherein every decision comes with the cost of forgoing the next best alternative.

The concept of opportunity cost is a fundamental principle of economics, and it is closely related to the idea of discount expense in accounting. For example, if a company has the option of paying less for a purchase by taking advantage of a cash discount, but chooses not to, the additional money spent represents the opportunity cost of this decision, akin to losing that cash discount. Similarly, in economics, if you spend your income on video games, the opportunity cost is what you can no longer spend on movies or any other goods or services.