In manufacturing accounting, it is very much important to have a clear difference between cost and expense, though in general two terms are considered interchangeable.
What is Cost 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.
What is 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 the expense. This will be charged to the revenue of that period, in which it is consumed.
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.
Difference between cost and expense (Cost vs Expense)
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.”
Cost is defined as “the benefits given up to acquire goods and services”. The benefits (goods or services) are measured in dollars by the reduction of assets or incurrence of liabilities at the time benefits are acquired. At the time of the acquisition, the cost incurred is for present or future benefits.
When these benefits are received, the cost becomes an expense. In other words, cost represents the amount invested in obtaining a product or service which have not yet expired, pr benefits or services of which have not yet been received or which have not yet been utilized or consumed in connection with the realization of revenue.
For example, if a machine is purchased for $100,000 on 1st January 2001 and its estimated useful life is 10 years with a scrap value of $10,000 at the end of 10th year, and $10,000 are paid for its erection, then, the cost of this machine on 1st January 2001 is $1,10,000 bu this cost on 31st December 2001 will be 99,000 (1,10,000 – 11,000 for Depreciation). Prepaid expenses, inventories of various kinds, properties and other assets represent examples of cost.
An expense is defined as a cost that has given a benefit and is now expired. Unexpired costs that can give benefit in the future are classified as assets. Depreciation of $11,00 ( as discussed in cost) represents the expired cost of machine for one year and maybe thus classified as an expense. In other words, expenses represent that portion of the acquisition costs of goods, property or services which have expired, been consumed or utilized in connection with the realization of revenue.
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 the 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.