Expense

 

Expense

Accountants use the term expense to mean a cost that has being used up while a company is doing its main revenue-generating activities. (That’s why only $400 of the cost of supplies was expended in our example.)

A cost may or may not be an expense. As we had seen above, $400 of the cost was an expense and $100 of the cost was an asset. Here is a more extreme example: If a company purchases land to be used in its business, the cost of the land will be reported an asset and will never become an expense. (The reason is that land will never be used up and therefore never depreciated.) The land’s entire cost will continue to be reported on the balance sheet as the asset Land as long as the company owns the land.

If a company purchases a delivery truck to be used in its business, the truck’s cost will initially be recorded as the asset Delivery Truck on the company’s balance sheet. However, the truck’s cost will become Depreciation Expense as the truck is “used up” in the company’s main, revenue-generating activities.

A cost might be an expense or it might be an asset. An expense is a cost that has expired or was necessary in order to earn revenues. We hope the following three examples will illustrate the difference between a cost and an expense.

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.

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. For example, 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 factors.

An expense, on the other hand, doesn't usually have an asset attached to it. An expense is an ongoing payment, like utilities, rent, payroll, and marketing. You could say that an expense is a cost of doing business, but I am going to avoid that word. Expenses are used to produce revenue and they are deductible, reducing the business's income tax bill.

For example, 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. There is usually no asset associated with an expense. Although we use the term "cost" with expenses, they are really just payments.

Cost and expense both sounds unfavorable elements of income statement since they both cause a decrease to net profit. In the accounting equation, the two are also naturally debit accounts (meaning they increase when debited and decrease when credited). Cost and expenses also cause an outlay in cash or an increase in liability when obtained. For example, a purchase of equipment causes cash outlay when purchased on cash payment and causes an increase in liability when purchased on account. The following is a list of some similarities between a cost and an expense.

Cost and Expense are commonly used terms in economics, business and accounting. The term cost refers to the value of money that has been used in order to produce something, and hence is not available for use anymore. Whereas the term expense has a very specific meaning. It refers to outflow of cash or other valuable assets from a person or company to another person or company.

I want to tell u simply that if we bought a raw material for $ 500 to produce some product. And after manufacturing that product we got $100 remained and $400 used in manufacturing that product. 
So in above example $500 is a cost and $400 is an expense.