Difference Between Cost and Expense
The key difference between Cost and Expense is that cost refers to the amount spent by the business organization for the purpose of acquiring an asset or for creation of the assets, whereas, the expense refers to the amount spent by the business organization for the ongoing operations of the business in order to ensure the generation of the revenue.
In the financial domain, the measurement of success of a business base on the negotiation of price and the cost incurred. In this article, we will discuss cost vs. expenses. We use these very often as interchangeably in the business discussion. Still, these two words have different meanings and applications in business, and this article intends to put forward that difference.
What is Cost?
We can define it as an amount paid or spent to acquire an asset (fixed asset) or paid towards the creation of an asset (prepaid expense). It is usually a one-time payment that we capitalize it and reflect as a balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. item. Investment in the purchase of such assets, which is a requirement for the continuance of the business, will give future benefits.
What is the Expense?
The expense can be defined as an amount paid or spent regularly towards ongoing business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. to ensure revenue generation. It is spent annually and is reflected in the profit and loss statement and, as such, impacts profitability. Also, the balance sheet cost is accounted as an expense in the profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period. guided by the matching principle, i.e., the expense should be recognized proportionately during the same period when it is utilized for revenue generation.
One of the examples is the purchase of plant and machinery for USD 1000. It is capitalized and is accounted for as a fixed assetFixed AssetFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. in the balance sheet. Now, let us consider that the depreciation of a fixed asset is over the next 10 years on a straight-line basis. Consequently, the depreciation expense would be USD 100 annually, and this depreciation is an example of expense.
Another example is the pre-payment of rent of USD 600 for the next 10 years, and we account for this in the balance sheet as a prepaid expensePrepaid ExpensePrepaid expenses are expenses for which the company paid in advance in an accounting period but which were not used in the same accounting period and have yet to be recorded in the company's books of accounts.. Now, the prepaid expense is to be spread out across 10 years at USD 60 annually as rent expense, and this is another example of expense.
Cost vs. Expense Infographics
Let’s see the top differences between cost vs. expense.
The key differences are as follows –
- Cost is an investment towards the purchase of assets for the future benefits of the business. At the same time, the expense is on the ongoing business for revenue generation.
- Cost is a one-time payment in nature, while expense is a regular payment.
- The balance sheet usually reflects Cost, while expense forms part of the profit and loss statement.
- A cost is recognized as an expense in the profit and loss statement as per the matching principleMatching PrincipleThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period.. However, we can never recognize an expense as a cost.
Cost vs. Expense Comparison Table
The bottom line is that to distinctively and correctly differentiate between cost and expense; one must understand the purpose and accounting treatment. I hope this article helps to avoid the interchangeable use of the two terms in the future.
This article has been a guide to Cost vs. Expense. Here we discuss the top differences between cost and expense along with infographics and comparison table. You may also have a look at the following articles –