Friday, 19 October 2012

What is The Difference Between Cost and Expense


What is The Difference Between Cost and Expense:

Cost :

Cost is the price of an asset. Sometimes it is called "Cost Basis." The cost basis of an asset includes every cost to purchase, acquire, and set up the asset, and to train employees in its use.

Ex: 
If a manufacturing business buys a machine, the Cost includes shipping, set-up, and training.

Cost basis is used to establish the basis for depreciation and other tax. 

Expense:

An expense, is a cost that has expired or was necessary in order to earn revenues. An expense is an ongoing payment, like utilities, rent, payroll, and marketing. 

An expense is a cost of doing business. Expenses are used to produce revenue and they are deductible, reducing the business's income tax bill.

Ex:
The expense of rent is needed to have a location to sell from, to produce revenue.

The cost of a business phone is required to take calls from customers who want to buy the business's products and services. T
here is usually no asset associated with an expense. Although we use the term "Cost" with expenses, they are really just payments.

Example : Cost Vs. Expense Explain:

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.

Sources:
Accountingcoach ,Biztaxlaw

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