Cost vs Expense

Accounting Tutorials

Cost vs Expense Differences

In the financial domain, the success of a business is measured on the basis of price negotiated and cost incurred. In this article, we will discuss cost vs expense. Cost vs expense is very often used as interchangeably in the business discussion, but these two words have different meanings and application in business and this article intends to put forward that difference.

What is Cost?

Cost can be defined 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 which is capitalized and is reflected as a balance sheet item. The amount is invested in the purchase of such assets which are required for continuance of the business and it will give future benefits.

What is Expense?

Expense can be defined as an amount paid or spent regularly towards ongoing business operations to ensure revenue generation. It is spent annually and is reflected in the profit and loss statement and as such impacts the profitability. Also, the balance sheet cost is accounted as an expense in the profit and loss account 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 of the cost is the purchase of plant and machinery for USD 1000 which is capitalized and is accounted as a fixed asset in the balance sheet. Now, let us consider that the fixed asset is to be depreciated 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 of cost is pre-payment of rent of USD 600 for the next 10 years which will be accounted in the balance sheet as a prepaid expense. 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

Here we provide you with the top 7 differences between Cost and Expense

Cost vs Expense Key Differences

The key differences between Cost and Expense are as follows –

Cost is an investment made towards assets purchased for future benefits in business, while expense is spent on ongoing business for revenue generation.
Cost is a one-time payment in nature, while expense is a regular payment.
Cost is usually reflected in the balance sheet, 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 principle, but an expense can never be recognized as a cost.

Cost vs Expense Head to Head Differences

Now, let’s look at the head to head differences between Cost and Expense

Basis for Comparison between Cost vs Expense	Cost	Expense
Meaning	Investment made towards the purchase of assets intended for future benefits in business	Regular payment made towards ongoing business for revenue generation
Financial Statement	Reflected on the asset side of the balance sheet	Reflected on the profit and loss statement
Purpose	Purchase of asset	Payment necessary to earn revenue
Effect on Profitability	Doesn’t impact the profitability of the company directly	Directly impacts the profitability of the company
Current Ratio	Cost incurred towards current assets impact current ratio	No impact
Capital Structure	Cost incurred towards non-current assets impact capital structure	No impact
Example	Fixed assets, prepaid expense, inventory etc.	Depreciation, interest expense, raw material expense etc.

Cost vs Expense – Conclusion

The bottom line is that in order 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.