Cost might be paid for an asset or an expense, for example, you purchase a car for a cost of $1,000 or pay interest cost of $10 on debt as an expense.
Expense is incurred when an amount is paid to earn revenues, for example, electricity used in a manufacturing process is an expense.
A Hypothetical Example
ABC Company is specialized in textile products like gents’ suits and bed sheets etc. During the current month following expenses incurred:
Raw material purchase (Initially the cost will be recognized as an asset, however, the portion of the material used in manufacturing will be treated as an expense and remaining portion of the cost will continue to be reported as the asset ) = $100
Wages charges paid to workers = $20
Electricity charges = $15
Packing Charges = $5
Loading and unloading charges = $4
Storage charges = $5
All above-mentioned expenses are being incurred to generate revenues or sale of products, however, the machinery being used for manufacturing was purchased at the cost of $20,000 and the company recognizes part of the asset’s cost as depreciation expense.
Basis of Difference
|Meaning||Cost might be incurred for expense or to purchase an asset.||Expense is a cost that expires or is necessary to earn revenues.|
|Example||Cost to purchase a building.||Fuel and power charges, payroll and other factory overheads.|
|Tax||Cost is not directly attributable to tax, however, periodic depreciation charges do.||Expenses are tax deductible and reduce tax bills.|