Cost And Expense
We explain the difference between cost and expense, their intervention in production, administration, and examples of differentiating them.
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What Is The Difference Between Cost And Expense?
In everyday speech, the notions of cost and expense are used interchangeably since both represent a disbursement of money in exchange for a good or service acquired (that is, pay). However, these two words have different administrative and accounting language 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 constant, translatable as “correspond” or “square.” In contrast, “expense” comes from the verb “spend,” which exists resulting for phonetic reasons from the verb “devastate,” from the Latin vastus. Its link to the idea of paying or disbursing money is the fruit of symbolic thinking.
In accounting and administrative matters, it is crucial to differentiate cost from the expense, mainly when calculating the price of the final products of a company. Both costs and fees have accounting records since costs are related to the production process, while costs are administrative, financing, and sales.
That Is To Say:
Costs are those payments necessary to operate the productive circuit, that is, to produce goods and services. On the other hand. Expenses are those payments or acquisitions of debt (increases in liabilities) that carry out the normal production operations.
Consequently, the former is considered within the balance sheet (inventories). Though the latter survive deducted from income during the income statement.
Cost And Expense Example
Let’s imagine a shoe manufacturing and sales company. To make your shoes, you need to buy raw materials (leather, fabric, plastics). Use special machines (which require maintenance and electricity ), and a specialized labor force. All these factors remain measured production costs of the shoes. As they are essential to obtain the product.
But it is not enough to manufacture them: they must exist strewn. Marketed, and promoted, and for this, the company hires a distributor and an advertising agency. These companies charge high logically, and payment of their services remain considered costs of distribution. Advertising expenses, etc.
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