What is the difference between cost and expense? These two economic or accounting terms are often used interchangeably. We read them in accounting and financial reports. And as business owners, we have to learn how to differentiate the two. The following are the differences between a cost and an expense:
1. A cost can be an expense or an asset or both, while an expense is always part of a cost.
2. A cost includes an unexpired cost (asset or, for example, the net carrying cost of a property) or an expired cost (expense or, for example, the depreciation expense recognized on the property) or both, while an expense is the expired portion of the cost (expense or, for example, the depreciation expense recognized on the property).
3. A cost is shown or presented either in the balance sheet (asset or, for example, prepaid insurance) or in the income statement (expense or, for example, insurance expense) or both, while an expense (for example insurance expense or the expired portion of insurance) is only presented in the income statement.
4. Costs may or may not be recognized as an expense over several reporting periods, while an expense is only recognized over a single reporting period.
5. Cost includes cost of goods sold or unsold goods or both, while expense only includes cost of goods sold.
6. Cost may or may not reduce income or profit, while expense always decreases profit.
7. Costs may or may not reduce income tax, while allowable deductible expenses usually reduce income tax.
8. Costs are incurred to obtain future economic bene?ts, either to acquire assets from other entities in exchange transactions or to add value through operations to assets it already has (Paragraph 178, FASB Statement of Financial Accounting Concepts). On the other hand, expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (F 4.25(b) of the IFRS Framework).
Examples of costs
1. The cost of property, which includes the net carrying cost of the property and the accumulated depreciation expense.
2. The cost of insurance, which includes the unexpired (asset) and expired portion (expense) of the insurance.
3. The cost of product, which includes the cost of unsold goods or inventory (current asset) and the cost of sold goods or inventory (expense).
4. Salaries and wages to personnel that are directly attributable to the finish products – either sold (expense) or unsold product (asset).
Examples of expenses
1. The depreciation expense recognized for the reporting period.
2. Insurance expense or the expired portion of the cost of insurance.
3. Cost of goods sold.
4. Salaries and wages to personnel that are directly attributable to the finish products sold.
5. Salaries and wages to administrative personnel.