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Jean   Murray

Cost vs. Expense - What is the Difference?

By July 21, 2011

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A quick question: 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.

Comments
July 17, 2009 at 4:19 pm
(1) Anupam says:

I am a Outsourcing consultant and I was in USA for a Outsourcing convention and some one asked me this Question and I did explained him that But he was not sure and clear about that then I went on net for some exemplas for the same and found this it helped him and me

Thanks
Anupam

October 28, 2009 at 3:47 am
(2) Pakistan says:

thanx!!!
it really did helpd

March 16, 2010 at 11:33 pm
(3) Abdul Qadeer Ahmadzai says:

this is the type of question mostly asked in interviews and one of my friend was also asked this question in interview so then i started searching the answer in many sites but i could not get satisfactory answer, thanks alot Murray thank you very much.
I will appreciate more if you could answer my question.
Q: what is the difference between Income & Revenue?

thanks
AQA

April 12, 2011 at 12:52 pm
(4) kamukamu says:

hya on the other hand cost are charged in production and expenses are charged in administration

thanx

June 1, 2011 at 7:03 am
(5) Faizan says:

it is very simple but damn effective. i really was in a fix but it made me clear and save my time.

Thanx
Faizan

July 5, 2011 at 12:56 am
(6) Akramul Alam says:

Cost is the sacrifice of something for future benifit whereas expense is for present benifit. I do believe it. Is it true? Please give your comment regarding it, so that will be helpful for me.

July 18, 2011 at 6:52 am
(7) Amjad Khattak says:

In short the difference between cost and expense is that the cost when expired become expense. e.g we purchases asset for $ 100, it is cost of the asset, and when we use it, its value decreases due to depreciation…depreciation is an expense,,, which is charged to profit and loss.

September 18, 2011 at 3:36 pm
(8) Mohamed sa'id abukar says:

I have confused this, becouse every day we hear “cost” “expense”. I have been looking for someone answering this question. Thanks Murry for you helping us(students)

April 4, 2012 at 2:38 am
(9) Kimkhanh says:

thank you so much.

August 10, 2012 at 1:32 am
(10) Livhuwani says:

Thanks!

Very helpful.

November 30, 2012 at 5:01 am
(11) felix says:

very clear and helpful – felix in vienna

December 10, 2012 at 4:39 am
(12) siraj khan says:

the expired cost is an expense

January 29, 2013 at 10:30 pm
(13) YING YU says:

IT’S THE BEST EXPLAINATION ABOUT “What is the difference between cost and expense?”
THANKS from YING YU in CANADA (2013-01-29)

November 12, 2013 at 12:00 pm
(14) EddieG says:

What is the cost of that phone?
What is the expense of that phone?

Thanx for the insight!

March 5, 2014 at 1:19 pm
(15) Naveed says:

What is different between cost and expenses. Its my assignment. thank you for help me…

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