Difference between cost and expense

In manufacturing accounting, it is of very much important to have a clear difference between cost and expense, though in general two terms are considered interchangeable.

Cost

The amount of cash paid or liability incurred for a commodity or service is referred to as the cost of that item. The commodity or service will obtain sale revenue in future. In other words, it represents the amount invested on a product or service, the benefit of which has not been fully utilized or consumed in connection with the realization of sale revenue.

Expense

Expense is that portion of cost which has been expired. As the commodity or service is consumed in the operation of a business enterprise consumed portion is converted into expense. This will be charged to the revenue of that period, in which it is consumed.

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In nutshell expense represents that portion of the acquisition cost of goods or services, which have been expired, consumed or utilized in connection with the realization of revenue.

Explanation

Cost means the total amount of money or other resources foregone or sacrificed to procure something or to achieve some objective. Word “expense” is also used to denote almost the same meaning. The difference between cost and expense is that when the benefit of resources given up can be realized in the future, we refer to them as cost. But where resources given up have no future potential benefit we call them as an expense. Thus ” A cost is an unexpired expense and an expense is an expired cost.”

Example

The difference can be explained with the help of the following example: Suppose a machine is purchased on 1st January 2018 for $1,00,000. Transportation and installation charges come to $10,000. Its total cost is $1,10,000. Suppose annual depreciation of this asset is $10,000.

The cost of the asset after a year i.e., on 1st January 2019 will be $1,00.000 = (1,10,000 – 10,000) and $10,000 is that portion of cost which has been utilized during a year, This utilized portion is expense.

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