Cost vs. Expense
The difference between cost and expense is often very difficult for some people to understand, and because of this it is common for these terms to be used indistinctly; without taking into account that they have different meanings.
We often hear people saying, “How much does that phone cost?” How much is the rent but the use of the word “cost” is misleading. In accounting, this word is reserved for special use. Below this post is all about the difference between cost and expense.
Difference between Cost and Expense
Cost is the price of an asset. In Accounting, it is sometimes referred to as a “cost basis.” The cost basis of an asset includes all the costs involved in its preparation and subsequent acquisition, the configuration or preparation of that asset, the training of employees in their use (in the case of a company). For example, if a person buys a room for a machine-manufacturing business, the cost is not limited to the purchase of the premises; but also includes shipping or transportation of machinery, commissioning and training of personnel. In Accounting, the cost basis is also used to establish the basis of depreciation and other fiscal factors.
In a general sense, when we buy a product, the cost of the product is deduced from the entire process that has been incurred to achieve its production. The cost is expected to earn income in the future. It is a way of “compensation for all the sacrifice”.
On the other hand, the expenses are not usually attributed to the assets. An expense is an ongoing payment, as is the case with public services, rental or rent, and marketing. In the case of companies as well as in individual cases, the expenses are not made with the purpose of generating subsequent income that can be deducted from them; but the expenses of necessity are incurred.
For example, if we have a company and we are not the owners of the building; it is necessary to pay the rent of the premises because otherwise we would not have a place to sell our product; Likewise, it is also necessary to spend on the invoice of the company telephone, because that way interested customers can call to purchase the product and the acquisition of said product by the customer, represents income for the owner of the company (what generates income in this case is the sale of the product, not the use of the phone itself).
Usually there are no assets associated with expenses, but sometimes we use the term “cost” instead of “expense” to refer to payments for some service, but as we could see, this is a mistake.
Key differences between Cost and Expenses
- The cost has to do with the assets, while the expense is related to the payments that are made in exchange for services.
- Physical or material objects are costly, while services are expenses.
- Of the expenses are not expected to generate income, but of the cost of a product.