What is the Cost Benefit Principle?

//What is the Cost Benefit Principle?
What is the Cost Benefit Principle? 2017-10-02T07:07:13+00:00

Definition: The cost benefit principle is an accounting concept that states benefits from an accounting system should always outweigh the costs associated with it. In other words, a company should get more benefits from using an accounting system or gathering data than the amount it costs to use the system or obtain the information.

What Does Cost Benefit Principle Mean?

The cost benefit principle spans all areas of accounting from the accounting system itself to the procedures needed to record transactions. One of the most basic examples of the cost-benefit rule is producing reports. Many accounting systems are able to readily produce specific reports and require hours of manual input and calculation to create. In many cases, a report is not worth the effort and expenses involved to produce it.

Example

Let’s take a look at a forensic accounting example. Let’s assume that a storeowner finds discovers that his trusted employee has been stealing from the company. He has no way of knowing how long the theft has been going on and the employee says that he only recently started stealing. Upon further investigation, the owner uncovers theft going back two years, so he hires an accounting firm to research and produce a report detailing all of instances of theft.

The accounting firm reports two full years of theft and also stumbles on transactions occurring five years prior. At this point, the owner realizes that the employee will never be able to repay the amount of money that was stolen in the last two years let alone anything that was stolen five years back, so he tells the accounting firm not to look into the transactions occurring more than two years in the past.

The owner realized that the cost of the accounting firm uncovering all of the theft was not worth the benefit. The owner will most likely not get repaid the stolen funds from the last two years, so it’s pointless to hire a firm to investigate prior to that.