BTL 838 - Costs Vs. Expenses

 

The Banking Tutor’s Lessons

BTL 838                                                                   09-11-2025

Costs Vs. Expenses

Costs can be defined as money paid or spent to acquire an asset. It is mainly a one-time payment that is capitalized and reflected on a balance sheet. 

Expenses sound similar to that of costs. The expense is an amount of money that must be spent especially regularly to pay for something. An expense is an ongoing payment, like rent.  It is spent monthly/quarterly/annually and is reflected in the income statement and such an impact on the profitability and margins. 

The balance sheet cost is accounted as an expense in the income statement guided by the matching principle i.e. expense should be recognized proportionately during the same period when it is utilized for generating revenue. For example, the Rs 20,000 car you purchased will eventually be charged to expense through depreciation over a period of several years. So here the initial amount of the amount you spent to purchase the car is a cost and depreciation which is going to occur for the next several years is expenses for handling that car.

Another example of cost is insurance prepayment of Rs 1200 for the next 12 months which will be accounted for in the balance sheet as a prepaid expense (current asset). Now, the prepaid insurance payment is to be equally divided across 12 months at Rs 100 monthly as insurance expense and this is another example of expense. 

 

Some of the major Differences between  Costs and  Expenses: 

1) Cost is a one-time payment in nature, while expense incurs regularly. 

 2) Cost is a balance sheet item and expenses are an income statement item. 

We  use  the term cost to refer to a tangible assets that are depreciated. The cost of an asset includes the cost of purchase, acquire, and set up the asset and to train the employee in its use. For example, if the manufacturing company purchased a machine, the cost includes shipping, set-up, and training. 

Expenses are used to produce revenue and they are  tax deductible items (means reduce the company’s income tax bill). 

Cost doesn’t directly affect taxes, but the cost of an asset is used to determine the depreciation expenses for each year, which is a deductible business expense.

Sekhar Pariti

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(Repetition of BTL 180 dt. 24-08-2020)