Cost vs. Expense: What's the Difference?

Costs and expenses are similar concepts, and they're sometimes used interchangeably, but there are some differences for businesses to consider. A cost typically refers to the price paid to acquire an asset, while an expense is an ongoing expense, such as an employee's salary or rent on a retail space.

What's the Difference Between Costs and Expenses?

Regularity

Cost is the amount that is paid to buy or obtain something. Cost implies a one-time event, like a purchase. The term "cost" is often used in business in the context of marketing and pricing strategies.

The term "expense" implies something more formal and something related to the business balance sheet and taxes. An expense is an ongoing payment, like utilities, rent, payroll, and marketing. For example, the expense of rent is needed to have a location to sell retail products from.

Accounting

Accountants use cost to refer specifically to business assets, and even more specifically to assets that are depreciated (called depreciable assets). The cost (sometimes called cost basis) of an asset includes every cost to buy, deliver, and set up the asset, and to train employees in its use.

The cost of assets shows up on the business accounting on the balance sheet. The original cost will always be shown, then accumulated depreciation will be subtracted, with the result as book value of that asset. All the business assets are combined for the purpose of the balance sheet.

Taxes

Expenses are used to produce revenue (seek profit) and they are deductible on your business tax return, reducing the business's income tax bill. To be deductible, they must be "ordinary and necessary" to the business.

Costs don't directly affect taxes, but the cost of an asset is used to determine the depreciation expense for each year, which is a deductible business expense. Depreciation is considered a "non-cash expense" because no one writes a check for depreciation, but the business can use it to reduce income for tax purposes.

Which Is Right For You?

Here are some situations in which it may make more sense to refer to "costs" rather than "expenses" (or vice versa).

When You Should Use Costs

Costs typically refer to the price paid to a producer or seller for a product you need. These costs can be fixed (consistent) or variable (fluctuating based on your sales volume, market conditions, or something else).

Costs can be direct or indirect. Indirect costs include labor, storage costs, and the pay for factory or warehouse supervisors. Direct costs include:

• Products bought for resale
• Raw materials to make products
• Packaging and shipping products to customers
• Inventory of finished products
• Direct overhead costs for utilities and rent for a warehouse or factory
  

For example, if a manufacturing business buys a machine, the cost includes shipping the machine, setting it up, and training employees to use it. Cost basis is used to establish the basis for depreciation and other tax factors.

When You Should Use Expenses

Expenses show up on your business profit and loss statement.

You can also consider an expense as money you spend to generate revenue. For example, consider these expenses:

• You need to spend money on advertising to get customers.
• You need to spend money on a phone number so customers can call you.
• You need to spend money on rent and utilities if you want to have a retail store for customers to visit.
• You need to spend money on a web page to attract online customers.
  

Frequently Asked Questions (FAQs)