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 interchangeably; without taking into account that they have different meanings. Difference Between Cost and Expense
We often hear people saying how much does that phone cost? How much does the rent cost? But the use of the word “cost” is misleading. In accounting, this word is reserved for a special use.
COST Difference Between Cost and Expense
Cost is the price of an asset. In accounting , it is sometimes called a “cost basis.” The cost base of an asset includes all the costs involved in its preparation and subsequent acquisition, the configuration or preparation of said asset, the training of employees in its use (in the case of a company). For example, if a person buys some premises for a machine manufacturing business, the cost is not only limited to the purchase of said premises; but also includes the shipment or transport of machinery, commissioning and training of personnel. In Accounting, the cost basis is also used to establish the depreciation basis and other tax factors.
In a general sense, when we buy a product, its cost is derived from the entire process that has had to be incurred to achieve its production. From the cost it is expected to obtain income in the future. It has been a way of “compensation for all the sacrifice.”
On the other hand, expenses are not usually attributed to assets. An expense is an ongoing payment, as is the case with utilities, rent or rent, and marketing. Both in the case of companies and also in individual cases, the expenses are not made with the purpose of generating subsequent income that is deductible from them; rather, expenses are incurred out of necessity.
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; In the same way, the expense is also required on the company’s telephone bill, because in this 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 the income in this case is the sale of the product, not the use of the telephone itself).
Generally 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 can see, this is a mistake.
Key differences between cost and expense
- Cost has to do with assets, while expense is related to payments made in exchange for services.
- Physical or material objects have a cost, while services represent expenses.
- It is not expected to generate income from expenses, but from the cost of a product it is.