![]() ![]() In both cases, you have expended funds to acquire the automobile and the product, but have not yet consumed either one. The cost of the automobile likely includes sales taxes and a delivery charge, while the cost of the product probably includes the cost of materials, labor, and manufacturing overhead. The cost of an automobile may be $40,000 (since that is what you paid for it) and the cost of a product you built is $25 (because that is the sum total of the expenditures you made to build it). Examples of asset classifications into which purchased items are recorded are prepaid expenses, inventory, and fixed assets. Thus, an item for which you have expended resources should be classified as an asset until it has been consumed. However, it does not mean that the acquired item has yet been consumed. Definition of CostĬost most closely equates to the term expenditure, so it means that you have expended resources in order to acquire something, transport it to a location, and set it up. The master glossary of the accounting standards codification that is maintained by the Financial Accounting Standards Board does not define either term consequently, the following definitions are derived from common usage. ![]() Unfortunately, cost and expense tend to be used interchangeably even within the accounting terminology. This situation arises with any expenditure related to a specific period, such as the monthly utility bill, administrative salaries, rent, office supplies, and so forth. A key reason why a cost is, in practice, frequently treated exactly as an expense is that most expenditures are consumed at once, so they immediately convert from a cost to an expense. These terms are frequently intermingled, which makes the difference difficult to understand for those people training to be accountants. The difference between cost and expense is that cost identifies an expenditure, while expense refers to the consumption of the item acquired. ![]()
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