We explain the difference between cost and expense, their intervention in production, administration and examples of how to differentiate them.
What is the difference between cost and expense?
In everyday speech the notions of cost Y spending are used interchangeably, since both represent a disbursement of money in exchange for a good or service purchased (that is, pay). However, in administrative and administrative language accounting, these two words have different meanings, as we will see below.
To begin with, these two words have different origins: “cost” comes from the verb “costar”, which derives from the Latin I will consist, translatable as "correspond" or "square"; while “expense” comes from the verb “spend”, which was derived for phonetic reasons from the verb “devastar”, from the Latin vastus. Its link with the idea of paying or disbursing money is obviously the fruit of thought figurative.
In accounting and administrative matters, it is important to differentiate cost from expense, especially when calculating the price of products end of a business. Both costs and expenses have their own accounting records, since costs are related to the production process, while expenses are related to administrative, financing and sales functions.
That is to say: costs are those payments necessary for the operation of the productive circuit, that is, to be able to produce goods and services. Instead, expenses are those payments or acquisitions of debt (increases in liabilities) that carry out the normal operations that accompany production.
Therefore, the former are considered in the balance sheet (that is, they are inventories), while the latter are deducted from income in the income statement.
In this way, the difference between costs and expenses can be summarized as:
| Costs | Expenses |
|---|---|
| They are related to production expenses. | They are related to non-operating expenses. |
| They are inventories. | They are not inventories. |
| They are expected to bring future earnings, that is, they recover quickly. | They do not bring future profits, but they can affect the margin of success of the product. |
| Examples of costs are: raw material, direct labor, factory maintenance, industrial security, etc. | Examples of expenses are: advertising and propaganda, employee training, office rent, distribution, etc. |
Cost and expense example
Let's imagine a shoe manufacturing and sales company. To make your shoes, you need to buy raw material (leather, fabric, plastics), special machines are used (which require maintenance and electricity) and one workforce specialized. All these factors are considered production costs shoes, as they are essential to obtain the product.
But it is not enough to manufacture them: they must be distributed, commercialized and promoted, and for this the company hires a distributor and an advertising agency. These secondary companies charge, logically, and the payment of their services are considered expenses: expenses of distribution, advertising expenses, etc.