Difference Between Cost and Expense

Cost vs expense

Cost and expenditure are closely related. You spend your resources in return for another thing of value.

Here is an example of how cost and expenditure are related. Buying a car for and paying for the materials needed to create a product are two different ways in spending your resources or funds. When the car starts to depreciate, you will realize that the fund you use for the car falls under expenses, while the fund you use in creating the product will soon become a cost of goods sold if the product will be sold.

However, there are times when people tend to confuse cost and expense and use them interchangeably. This happens a lot because cost and expense means spending funds on something. They are the same in the sense that you have to let out some of your resources, but the manner of how these funds are used makes the difference between cost and expense. You will notice that a cost has a return while an expense is something that just takes away money from your pocket.

You will easily notice the difference between cost and expense by determining the part of the cost that is already expired, utilized, or depreciated. The part of the cost that is already used or expired is called expense. So when you have determined if the money you have spent is on something that may depreciate in value or expire, then it is an expense. If you notice that a resourse expended is going to an expense, then a cost is forgone. Expenses are reported in the income report, because it shows how much income was taken or used for that expense. On the other hand, cost is reported in the balance sheet because it shows that there will be more balance in the balance sheet as the cost will have its returns.

These are some simple examples, definitions, and differences of cost and expenses. With this, people can distinguish cost from expenses. People tend to use cost and expense in the wrong way. People use the word cost when they are buying things with no return of investment, when in fact cost is used when you are buying an asset. Assets put money in your pocket, like businesses. This is one of the most important differences between the words cost and expense. Cost is used for buying assets, while expense is used when buying liabilities.

SUMMARY:

1.

Cost is used on something that has returns, while expenses are expenditures used on things that depreciate.
2.

Cost is reported in the balance sheet because it means more funds will come to the balance sheet after the expenditure. Expense on the other hand, is reported on the income sheet because it will be taking away funds from the income sheet in making the expenditures.
3.

Cost is used when one is buying assets while expense is used on buying liabilities or things that eventually expire.

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