What Is The Difference Between Cost And Expense? This Is The Explanation

Accountants who have often made financial reports certainly understand the cost and expense variables. The two terms are important, do not ignore them.

But what is the actual definition of each cost and expense ? Here’s the explanation.

Definition of Cost

Cost are expenditures made in the context of producing goods or services. The purpose of production is to gain profit or obtain economic value benefits in the future.

An example is the purchase of assets. In making a purchase, the cost of obtaining the asset must be made in advance.

This purchase will certainly result in reduced cash. But remember the benefits in the future that bring economic benefits.

The accountant’s job is to organize expense accounts to be made into company assets, even when calculating asset depreciation. In this variable, the source of the cost is also mentioned.

The cost of purchasing assets can be seen in the balance sheet. The costs that are listed and make the accumulation will be deducted, so that the results can later be displayed in the book value of the asset.

Also read Overhead Costs are: Functions and Examples

Definition of Expense

Expenses means the reduction in economic value within one accounting period. The decrease was in the form of asset expenditure. In other words, there is a liability condition that results in a decrease in the value of equity, even though it is not related to distribution to investors.

In simple terms, expenses are sacrifices that must be issued as well as needed which will later be useful in income. Expense is calculated in one accounting period.

Difference between Cost and Expense

There are four easy ways to distinguish cost from expense . Here’s the explanation.

On Financial Statements

The prominent difference lies in the position of the two in the financial statements. Costs displayed in the report at the time of preparing the balance sheet generally also have a form that cannot be used and/or cannot be predicted. So it is considered to be useful.

Meanwhile, expenses appear in the income statement. Expenses are in the form of expenditures that have been made and will not provide future benefits in less than one year.

In the Accounting Period

The difference between cost and expense is also seen from the accounting period. Cost is calculated for more than one period. Therefore, the cost is still considered as a capital expenditure.

Meanwhile, expenses, as mentioned above, appear in less than one accounting period. Expense is considered an expense that can generate income. Both of these can be referred to as expense recognition.

Source

Cost is removed from the company’s capital or assets. Thus the expenditure that has been issued is higher. It could even cost the same amount and value as other assets with a continuous period.

Meanwhile, expenses are sourced from the value of income. In addition, the expense also does not exist in the next accounting period. However, the value of expense is generally relatively smaller than cost .

Benefit

Cost aims and affects income, while expense aims to provide benefits to resources.

Benefits at expense will also have an effect on the capital received afterward. However, expenses have a greater effect than costs related to company finances.

Please read general journal definition and example.

Type of Cost

There are two types of costs or costs, namely manufacturing costs or production costs and non-manufacturing costs or non-production costs.

1. Production Cost

Production costs affect the process of producing goods or services. Without production costs, goods and services cannot be sold.

a. Raw Material Cost

These costs are expenditures that are useful in producing the goods or services offered. Each product will be charged the cost of raw materials, hereinafter referred to as capital value.

The cost of these raw materials can be calculated physically. For example, in garment and textile companies, the raw materials are cloth, yarn, dye, and others.

b. Direct labor costs

These costs are incurred to provide wages to human resources (HR) who are directly related to the process of producing goods or services. Generally, it is these human resources who process raw materials into goods that are ready to be sold.

All goods and services produced are charged with direct labor costs. The costs incurred can also be calculated physically.

For example, in a garment or textile company, the human resources involved are designers, tailors, to employees who work in offices.

c. Overhead Cost

Overhead costs are costs that are outside of the expenditure of raw materials and HR wages. These costs are difficult to trace because they are more extensive and complex.

Examples are indirect labor costs, raw materials excluding raw materials, taxes, insurance, and others.

2. Non-Production Costs

These costs involve planning, development, product distribution, marketing, administration, to customer service. There are two types of non-production costs.

a. Marketing Fee

These costs are incurred in connection with marketing, distribution, and service of goods or services.

b. Administrative costs

These costs relate to planning, development, and other administration in a company. Administration fees are not charged to manufacturing or marketing costs.

Why does administration include expenses? The reason is that these costs are incurred to expedite the process of production and buying and selling. Thus, the company’s goals are met.

Also read: Variable Costs and Fixed Costs: Complete Explanation

Expense Type

Based on its function, expenses are divided into five types. Here’s the explanation.

1. Accrued Expenses

This expense must be repaid in the next accounting period.

2. Bad Credit Load

This expense exists because of bad debts . There are various possibilities for this to arise, for example the debtor goes bankrupt and it is impossible to pay his debt.

3. Operating Expenses

These expenses arise related to business operations, such as marketing expenses.

4. Depreciation Expense

Depreciation expense arises due to reduced use value due to the use of physical assets. For example, depreciation expense due to the use of production machines.

5. Deferred Expense

Deferred expenses or prepaid expenses are expenses that have been paid off but have not yet benefited.

Please read understanding return on investments.

Bookkeeping Example

The following describes an example of a bookkeeping case of cost and expense .

A textile company that produces fabrics every day needs machines to produce their goods. This year the company wants to buy a new machine for $ 400,000,000 with depreciation calculated at $ 60,000,000 per year.

From this case, it can be classified that the purchase of a machine is a cost because it spends capital and is used for a long time, namely more than one accounting period. Meanwhile, depreciation and maintenance expenses only reduce income and do not exceed one period.

Here’s an example of the bookkeeping.

Cost _

Machines (assets) $ 400,000,000

Cash $ 400,000,000

Expense (Load)

Machinery Depreciation Expense $ 60,000,000

Accumulated Machine Depreciation $ 60,000,000


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