Difference Between Costs vs Expenses
Every business incurs costs and expenses for generating revenue. If we look at the income statement and balance sheet of the company, we will see different costs viz. cost of an asset, manufacturing overhead, prepaid expenses etc. and expenses such as advertising, marketing, administration, and depreciation etc. In this Cost vs Expenses article, we will try and understand the key differences between the two major parameters of any business
Cost is an amount that has to be paid or spent to buy product or services. Cost can be specific, like, “What’s the cost of that motorbike?” or it can be a penalty, like “Consider the cost of missing any event.” Consider an example. Assume that Tata Motors Ltd. manufactures cars and needs to buy some new metal fabrication machines to form the outer body of the car. When the company buys the machines, the price Tata Motors pays or promises to pay is a cost. It can also be defined as money paid or spent to acquire an asset. It is mainly one-time payment which is capitalized and reflected on a balance sheet. The amount spent on the purchase of such assets which are required for the business to earn future benefits.
Expenses sound similar to that of costs. The expense is an amount of money that must be spent especially regularly to pay for something. An expense is an ongoing payment, like rent, depreciation, salaries, and marketing. It is spent monthly/quarterly/annually and is reflected in the income statement and such impact the profitability and margins. Also, the balance sheet cost is accounted as an expense in the income statement guided by the matching principle i.e. expense should be recognized proportionately during the same period when it is utilized for generating revenue. For example, the $20,000 car you purchased will eventually be charged to expense through depreciation over a period of several years. So here the initial amount of the amount you spent to purchase the car is a cost and depreciation which is going to occur for the next several years is expenses for handling that car. Another example of cost is insurance prepayment of $1200 for the next 12 months which will be accounted in the balance sheet as a prepaid expense (current asset). Now, the prepaid insurance payment is to be equally divided across 12 months at $100 monthly as insurance expense and this is another example of expense.
Costs vs Expenses Infographics
Below is the top 7 difference between Costs vs Expenses:
Key Differences Costs vs Expenses
Both Costs vs Expenses are popular choices in the market; let us discuss some of the major Difference Costs vs Expenses:
- Cost is a one-time payment in nature, while expense incurs regularly.
- According to the matching principle, costs are recognized as expenses on the company’s income statement, but regular expenses/payments can never be recognized as costs.
- For future benefits the company makes investments for purchasing assets/property and incurs costs; however, expenses are required for maintaining that assets/property.
- Cost is a balance sheet item and expenses are an income statement item.
Costs vs Expenses – Comparison Table
Let’s have a look at the Comparison between Costs vs Expenses:
|The Basis of Comparison Between Costs vs Expenses||Costs||Expenses|
|Meaning||Investments/expenditure made for purchasing assets/property.||Regular expenses required for maintaining the assets/property.|
|Place in financial statement||Is a balance sheet item.||Is an income statement item.|
|Impact on profit margins||It does not directly affect profit margins of the company.||It directly affects profit margins of the company.|
|Motive||Purchase/addition of an asset.||Payment necessary to generate revenue from these purchases/assets.|
|Impact on capital structure||It does impact capital structure if the asset is non-current.||There is no impact on a company’s capital structure.|
|Impact on liquidity ratio||If current asset impact liquidity ratio.||There is no impact on liquidity ratio.|
|Example||Fixed asset, prepaid rent, inventory etc.||Raw material, depreciation, labor cost etc.|
For operating any business understanding of costs vs expenses is very important. While running the business you must need to purchase/acquired assets and has to spent amount to maintain that asset for revenue generation. If you are not generating the significant amount of revenue from purchased asset and expenses for maintaining that assets are high, then it will directly impact on bottom line growth of the company.
The accountant uses the term cost to refer specifically to a tangible asset, and even more specifically to assets that are depreciated. The cost of an asset includes the cost of purchase, acquire, and set up the asset and to train the employee in its use. For example, if the manufacturing company purchased a machine, the cost includes shipping, set-up, and training.
On the other hand, in the business sense, an expense is an item of business outlay chargeable against revenue for the specific period. They are subtracted from revenue/gross income in the calculation of profit/losses. Expenses are used to produce revenue and they are tax deductible items means reduce the company’s income tax bill. Cost doesn’t directly affect taxes, but the cost of an asset is used to determine the depreciation expenses for each year, which is a deductible business expense.
This has a been a guide to the top difference between Costs vs Expenses. Here we also discuss the Costs vs Expenses key differences with infographics and comparison table. You may also have a look at the following articles to learn more-