Cost and Expense – Know the Differences

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Cost and Expense

There are several terminologies in the business faculties to define factors. These factors imply profits or the loss of business. Businesses are related to prices paid or gained for income and growth. This is where the terms cost and expense are known. These terms allow the business to manage its income. The terms are quite similar in meaning with specific differences. Cost is the spent money while expense is the consumption price on a product or purchase. These are intermixed in business accounting. It is very important to know the difference between them as they have different applications in the business field.


Cost and Expense – Know the Differences

Cost

Cost

In simple terms, the cost is the sum that needs to be paid to buy something. It is the expenditure, that is followed by the expense of products, their transportation, and set up using a monetary item. Cost is either a particular expenditure or a penalty and is capitalized in the business. It is indicative of a one-time action. It is used in business for marketing or price of sale products.

Costs are like the advantages of purchasing products and services. The benefits are expressed in dollars gained by reducing the asset and sustaining the liabilities. Usually, these costs are unexpired to give assets.

The products become assets as soon as these are consumed. There are inventory, fixed assets, and prepaid expenses. The cost of something bought, with taxes and delivery charges before consuming is known as a fixed asset. On the other hand, the cost of something produced with a production charge is known as an inventory asset. If an employee is given an advance payment, this is called prepaid expenses.

Read more: 10 Ways To Cut Business Costs


Expense

Expense

The term expense refers to something more formal and connected to the balance sheet and taxes. Expense is a cost after the purchased item has been expended. As the item is used after the purchase, it comes with extra expenditure. There is no asset relating to the expense. However, the cost of the asset becomes an expense. It might be an expense by using debit from the depreciation expense account. With credit, the conversion goes to the accumulated depreciation account. Depreciation changes the asset into expense after its consumption over time.

Another way of thinking about an expense is any cost incurred to raise sales under the matching theory. An inventory is transformed into the cost as soon as a sale occurred. Under the matching theory, there is equal consideration for both the revenue and cost dimensions of a transaction, such that the net benefit or loss associated with the transaction is understood. An expense turns to a cost when revenue is known. Money is also spent as an expense to make revenue. This includes advertising to attract customers to buy products or rent and utilities for stores or the price of maintaining a web page.

Expense is the benefit that comes with the expenditure are then expires. Most expenditures are consumed at an instant so expenses turn to a cost. This condition emerges for any expense relevant to a particular time, such as the monthly utility bill, staff wages, rent, office supplies, etc. So cost and expenses are substitutable with consumer’s use of products. An expense might be a regular payment, like rent, utilities, payroll, and marketing.

Also read: Why You Should Not Pay Your Employees in Cash


Meaning of Cost in Accounting

Meaning of Cost in Accounting

In accounting, the meaning of cost is specific to terminologies.

Cost of goods sold: This refers to calculating the costs of products sold at the end of a year.

Direct costs– Costs of purchases for resale, raw materials, packaging, and delivery, inventory assets and costs related to store utilities.

Indirect costs– Costs of labor, storage, and payment in warehouses or factories.

Cost of an asset- In accounting, the cost is implied to business assets, especially those that are depreciated (depreciable assets). The cost of an asset is inclusive of every cost connected to the asset such as production, set up and tax. All the costs are provided on the balance set.


Meaning of Expense in Accounting

Meaning of Expense in Accounting

Expense is the cost that is spent and needs to be refunded with time, and this decreases the business’s revenue. The business begins every month with a gross income and as time passes by, there expenses that are deducted to achieve the net profit at the end of the month. The balance sheet cost is also referred to as an expense.


Major Differences

 

– Cost is an investment for future profits in business from assets bought, while expense is the amount spent regularly for creating revenue.

– The Cost is a price that is paid once, but expense continues.

– Cost is given in the balance sheet and expense is calculated to get profit and loss statements.

– A cost is changed to an expense by the matching principle, but an expense is never known as a cost.

– Cost doesn’t affect the profits of a business directly, but the expense has a direct impact on profits.

– A cost has an impact on the capital structure of a business and also on the liquidity ratio. An expense has no such impacts.

– A cost is made for potential benefits in the future, but expenses don’t bring any benefits to the business.


Cost and expenses provide data about the use of resources in a business. The purpose of making a cost or expense is important to keep in consideration. Sometimes, the cost is less than the expense and this leads to a loss in the business. Business is structured on the costs and expenses of purchases. If the cost of a product and the associated expenses aren’t monitored carefully, this would affect the business. Expenses generate revenue and decrease the income tax of the business.

While costs regulate the depreciable expenses of the year. So it is important to make careful purchases of products that would turn into assets. The expenses related to these should also be done with management to avoid loss. By understanding the cost and expense in a business, one is capable of managing business growth.

Read more: Best Expense Tracking Apps of 2020

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