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May 7, 2008

What is the 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.

The matching principle guides accountants as to when a cost will be reported as an expense.

Learn more about this topic at Accounting Principles and Adjusting Entries.

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Comments

14 Responses to “What is the difference between cost and expense?”

  1. niraula on June 3rd, 2008 4:27 am

    very nice!

  2. guru on September 16th, 2008 1:39 am

    Nice one. should take common examples too.

  3. sanjel on October 21st, 2008 8:46 pm

    GOOD

  4. Susan on January 11th, 2009 2:07 pm

    Excellent.

  5. shani on January 13th, 2009 1:30 am

    i have magazine, i bought pictures For the purpose to add my magazine
    Actually wht is the expense?

  6. Akash on January 13th, 2009 3:04 pm

    This site is more useful for those who can improve it’s accountability knowledge. It’s too good, superb is best for it.

  7. shine on January 21st, 2009 6:57 am

    cost is over asset and expense is asset that used by us.by this example you understand diffrence between cost and expense.
    if you pay six month rent of building is 6000 and it is prepaid know your cost is your asset that is 6000. after one month your cost is 5000 and your expense is 1000 that used by you.

  8. uzma on February 3rd, 2009 1:29 am

    Asset or wealth which has used for gaining something is called expense and aset or wealth which has kept for further expected expense is known as cost.for examle for a trip we kept rs 1000 with us which is cost of that trip and during that trip money which we used for meal or anything else will be our expense

  9. sunil on March 16th, 2009 5:54 am

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  10. raza on April 24th, 2009 10:30 pm

    yes it is nice to have this site, good knowledge. and good way of confirming already have knowledge.

  11. raza on April 24th, 2009 10:31 pm

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  12. ochoechi on May 5th, 2009 10:41 am

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  13. ochoechi on May 5th, 2009 10:43 am

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  14. arun dubey on June 12th, 2009 9:46 am

    value paid for something is called cost.
    and if we get a benefit from this cost is called a expense.
    and if never get a benefit from this cost is called a loss

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