Cost and expense are two widely used terms in accounting which are also used interchangeably. However, they have different meanings and should be interpreted accurately. The key difference between cost and expense is that cost is the monetary value spent to obtain something whereas expense is an item charged against generating revenue. Costs and expenses should be analyzed against revenues for the accounting period.
Cost is an amount that has to be paid to acquire something. In accounting terms, costs are classified at various levels.
According to IAS 16– ‘Property, Plant and Equipment’, a cost of an asset includes the funds paid to acquire the asset, the cost of site preparation, shipping, handling, and installation. The cost of an asset is reflected in the balance sheet. The asset is not fully consumed yet, thus this should be recorded as a cost.
E.g.1 ADR Company purchased a building which has a cost of $100,500 which has an economic useful life of 40 years.
Cost of Goods Sold is the addition of all the direct charges such as materials, labor, and overheads used to produce revenue.
Expenses also can be accrued or prepaid and both these types should be accounted for.
Figure 1: Expenses are incurred in various ways and different organizations can categorize them at their discretion.
Cost is the monetary value spent to obtain something. Expense is an item charged against generating revenue.
Cost of assets and cost of goods sold are main types of Costs. Expenses can be accrued, prepaid or items recorded to compensate for the use of assets.
Cost is not directly attributable to tax; however, the depreciation charge for cost of the assets is tax deductible Expense is tax deductible; thus it reduces the tax bill.
Understanding different types of costs and expenses assist better realization of the difference between cost and expense. While Expenses are recognized against revenue, the value of costs is apportioned and written off as expenses to indicate a reduction in their value. Further, expenses are more beneficial from a tax saving point of view compared to costs.
1.Murray, Jean. “What’s the Difference Between Costs and Expenses?” The Balance. N.p., n.d. Web. 09 Mar. 2017.
2.”IAS 16- Property, Plant and Equipment.” International Accounting Standards. N.p., n.d. Web. 9 Mar. 2017.
3.”What is the difference between cost and expense? – Questions & Answers.” AccountingTools. N.p., n.d. Web. 09 Mar. 2017.
4.”Accruals and Prepayments.” Accrual Accounting – Prepayment Accounting Explained with examples. N.p., n.d. Web. 09 Mar. 2017.