Regular business costs that reflect in the general ledger and have a direct impact on the profitability of a company are referred to as explicit costs or accounting costs. The dollar amounts of explicit costs are specified and flow through to the income statement.
These costs are simple to identify and link to the activities of a company’s business to which the expenses are assigned. The remaining income that is left once all explicit costs are paid is reflected in a business’s net income. Since they have a significant effect on a company’s bottom line, explicit costs are the only accounting costs that are required to determine a profit.
Explicit costs are associated with tangible assets & monetary transactions, and they lead to substantial business prospects. Because of their proper documentation, explicit costs are simple to identify, document, and audit. Depreciation expense is indeed an explicit cost since it pertains to the underlying asset’s cost held by the firm, even though it is not a physically traceable action.
Here’s how to calculate explicit costs:
Importance of explicit cost:
· Explicit cost is a significant indicator for long-term strategic planning inside a company as it is used to measure a company’s profitability.
· The remaining income, once all explicit costs have already been paid, is shown in the net income. It will be the only cost for which profit must be calculated, hence it is emphasized.