Definitions of Cost and Expense
Some people use cost interchangeably with expense. However, we use the term cost to mean the amount spent to purchase an item, a service, etc. Some costs are not expenses (cost of land), some costs will become expenses (cost of a new delivery van), and some costs become expenses immediately (airing a television advertisement).
Examples of Costs and Expenses
Assume that a company purchases 2,000 units of a supply item each of which has a cost of $5. If none of the units have been used, the current asset supplies will be reported at the cost of $10,000 (2,000 units at $5 each). At the time of the next balance sheet, only 500 of the units are on hand and 1,500 units have been used in the business. As a result, the balance sheet will report the supplies on hand at their cost of $2,500 (500 units at $5) and the income statement will report supplies expense of $7,500 (1,500 units at $5).
Assume that a company purchases a delivery truck to be used in its business. Initially the truck’s cost will be recorded in the asset account Delivery Truck. However, the truck’s cost will become Depreciation Expense as the truck is “used up” in the company’s revenue-generating activities.
