Cost vs. Expense - What is the Difference?

A quick question for the weekend: What is the difference between cost and expense?

This difference is a little tricky to figure out, because we often use the terms interchangeably. We say, "What does this cost?" "What is the cost of that phone?" "How much does your rent cost?" But the use of the word "cost" is deceiving. Accounting types reserve the use of the word "cost" for one special use:

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.

Still confused? Just think of "cost" with assets and "expenses" with payments. It's like "debits and credits," but I don't want to get into that on a hot summer weekend.