Implicit costs are costs on which the firm waives any opportunity of earning a profit from the use of its internal resources by third parties, such as the rent that a firm would earn if it leased out a building that it owns instead of using it for its own operations. They are also costs that the firm cannot account for, such as the depreciation of equipment or the cost of hiring an employee. For this reason, they are not recorded on any financial statement. These costs are generally hard to quantify since there is no physical exchange of cash or transaction directly related to them; however, some businesses single out these as costs of potential sources of income.
In a nutshell :
- An implicit cost is a cost that exists without the exchange of cash and is not recorded for accounting purposes.
- Implicit costs represent the loss of income but do not represent a loss of profit.
- These costs are in contrast to explicit costs, which represent money exchanged or the use of tangible resources by a company.
- Examples of implicit costs include a small business owner who may forgo a salary in the early stages of operations to increase revenue.