The terms “cost” and “expense” are often used interchangeably. However, in accounting, there is a conceptual difference between the two terms. Cost constitutes an asset-type element- i.e., it is typically associated with an asset: an amount paid to acquire an asset or achieve an objective. Broadly, cost is the total amount of money or other resources an entity sacrifices in order to acquire another economic resource (e.g., a fixed asset).

For example, buying a building or a machine is a cost (to the buyer). In this sense, cost is a one-time price that a buyer pays for an asset (i.e., that specific asset). Technically speaking, cost is associated with an asset that has not yet expired, and hence it is reflected on the statement of financial position (balance sheet).

On the other hand, an expense is an amount paid in order to earn revenues. Technically speaking, it is a cost that has expired in the process of revenue generation. In this sense, expenses are reflected on the statement of income (P&L statement).

Reporting a cost as an expense depends on the very nature of it and is guided by the matching principle. For example, an entity may procure insurance for its properties over a specific period of time. The amount paid for insurance over a respective coverage period will be presented as a cost on the balance sheet. On initial recognition, insurance payment is reported as a current asset (specifically, prepaid insurance since the asset associated with this payment has not expired). However, at the time part of the coverage (prepaid insurance) expires, an entity will report the respective amount on its statement of income (as insurance expense), depending on the rate at which insurance cost is set to expire.