I want to tell you 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.
Let’s say your company is in the catering business and will cater its biggest event this evening. In the morning your company purchased about 125% of the paper goods that you believe will be used at the event. (You purchased the additional 25% for future events and also to ensure you don’t run out of these items at this evening’s event.) The paper goods that were purchased had a cost of $500, and only $400 of the paper items were used at today’s event. The remaining $100 were put in your company’s store room for use at the events to be catered in the next few weeks. In this example, the cost of $500 consisted of a $400 expense and a $100 asset. 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 expensed 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.
In a non technical sense the words cost and expenses are used interchangeably. But in cost accounting difference is recognized between the two. The term cost refers of that part of the acquisition price of a product or a service, which is expected to be useful in sense of obtaining sales revenue. In other words, cost represents the amount invested in obtaining a product or services which have not yet expired or benefits or services of which have not yet been received or which have not been yet utilized or consumed in connection with the realization of revenue. Expense on the other hand, refers to that cost which has expired or which has been charged against revenue of a period.
In order to understand the nature of cost accounting properly and to accomplish its purpose efficiently, it is highly essential to have a basic knowledge of the various class or elements or component of the cost. Costs are classified in different ways having regards to the objective for which they are being classified. Since cost accounting so essentially utilitarian, the useful or beneficial aspect is always kept in mind for each classification or grouping of cost.
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.
The money you spend on short trem obligations called expense e.g buy a note book. And the money you spend on long term projects called cost e.g build a house for commercial use.
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.blog.accountingcoach.com
