Differences between Explicit Cost and Implicit Cost

Explicit costs are those cost which are actually incurred and therefore are recorded in the books of accounts by the company. Example of it is rent paid, salary paid to workers, price paid for raw materials etc…, Explicit costs are also called accounting costs. In other words there is outlay of cash from the company in case of explicit costs.

Implicit costs are those costs which are not actually incurred and therefore also not recorded in the books of accounts. It is closely related to opportunity cost which implies that if a person chose a alternative he is forging the benefit he may he received by choosing the other alternative. In case of company implicit cost is the cost of capital which the owner may have earned if he or she had invested somewhere else or salary he could have received if he or she had worked elsewhere instead of working in the company. Implicit costs are also called economic costs, and there is no outlay of any cash from the company in case of implicit costs.

It is for this reason that there is difference between accounting and economic profit which company earns during a year.

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