Economy

Differences between costs and expenses

It is common to hear in a conversation between people, talking about how much money they spent or how much a product or service costs and therefore they are words that are commonly used interchangeably and that is not right. This may be because many people do not understand the differences between the two terms. Therefore, in order to make correct use of the terms cost and expense, we will try to differentiate them in this article.

cost/cost

The cost has to do with the set of monetary commitments that must be used to generate a good or service. They can be mentioned as inputs, raw materials, energy, labor, etc., that is, the cost includes all the associated factors that end up being a direct part of the final product or service.

We can also say that the cost of an asset is all the expenses related to its production and acquisition, preparation, training, etc.

In general, it can be said that when we acquire a good or a product to work with, the cost of said product is given by the entire process that it has had to go through to achieve its production. From this cost we can expect to obtain remuneration or monetary compensation in the future.

For example:

For a company that wants to be able to install a plant to manufacture electrical appliances, its initial costs would include not only the purchase of an asset to be able to start its activities, but also the purchase and transfer of the necessary machinery, the start-up, recruitment and training of the personnel that will operate the machinery, among others.

Spending

The expense has to do with the services that we take for some need that we have, such as the case of renting a place, public services such as water, electricity, telephone, among others.

Likewise, both in the case of a company and in the personal case, the expenses are not made in order to generate future remuneration, but are made in order to satisfy the need for that service.

For example:

When we have a company that does not have a physical place to operate and does not have the capital to acquire one, we must resort to renting, since, without having a physical place to operate, we will not be able to develop our economic activity.

Likewise, it can be said that we must spend on telephone service, because that would be our communication channel with our suppliers and customers who, in turn, could be buying our products. However, the benefit that is generated is from the sale of the product as such and not the service as such.

Differences between costs and expenses

costs Expenses
The cost has to do with the obligations that must be canceled to produce a good. The expenses have to do with the payments that are made in exchange for some service that represents a need.
Tangible or material objects have a cost. The services received represent an expense.
The cost of a product is expected to generate a monetary compensation. The expenses are not expected to generate any monetary remuneration.
Costs are capitalized. Expenses cannot be recovered.

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