Cost : Cost is the cash or cash equivalent value sacrificed for goods and/or
services that are expected to bring current and/or future benefits to the
entity.
Expense : In common usage, an expense or expenditure
is an outflow of money
to another person or group to pay for an item or service, or for a category of
costs. For a tenant,
rent is an
expense.
In accounting,
expense has a very specific meaning. It is an outflow of cash or other
valuable assets from a person or company to another person or company. This
outflow of cash is generally one side of a trade for products or services that
have equal or better current or future value to the buyer than to the seller.
Technically, an expense is an event in which an asset is used up or a
liability
is incurred. In terms of the accounting equation, expenses reduce owners' equity. The International Accounting
Standards Board defines expenses as 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.
19# Difference between cost and expense :
A cost might be an expense or it
might be an asset. An expense
is a cost that has expired or was necessary in order to earn revenues. We hope
the following three examples will illustrate the difference between a cost and
an expense.
A company has a cost of
$6,000 for property insurance covering the next six months. Initially the cost
of $6,000 is reported as the current asset Prepaid Insurance. However, in
each of the following six months, the company will report Insurance Expense of
$1,000—the amount that is expiring each month. The unexpired portion of the
cost will continue to be reported as the asset Prepaid Insurance.
The cost of equipment used
in manufacturing is initially reported as the long lived asset Equipment.
However, in each accounting period the company will report part of the asset’s
cost as Depreciation Expense.
A retailer’s purchase of
merchandise is initially reported as the current asset Inventory. When the
merchandise is sold, the cost of the merchandise sold is removed
from Inventory and is reported on the income statement as the expense
entitled Cost of Goods Sold.