Chapter 2, Problem 1RQ

What is the difference in meaning between the terms cost and expense?

To determine

Explain the difference between cost and expense.

Explanation of Solution

Cost:

Cost is the money that is spent to buy or produce any item. Cost refers to the sacrifice of resources. Whenever we buy or produce any item, then we give up the chance to buy some other item. The cost of an item is represented by the opportunity cost of not buying another item.

Expense:

The expense is a charge from the revenue of the business. We paid expenses from the revenue generated from the business. Expenses are related to a particular period. It is only applicable to external financial reporting.

Difference between cost and expenses:

Serial no.	Basic of difference	Cost	Expense
1.	Definition	Cost is the money utilized in buying an item.	The expense is the amount charged against the revenue of the business.
2.	Period	Once spent, the cost can be utilized for several years.	The expense is spent on a financial year only.
3.	Purpose	Purpose of the cost is to produce or purchase an asset.	Expenses are occurred to generate the revenue of the business.
4.	Frequency	Cost does not occur frequently.	Expense occurs very frequently in business.
5.	Examples	Fixed assets, prepaid expenses and stock.	Salary, depreciation, Interest paid and stationary expense.

Table: (1)