The cost, interest, and other charges that are incurred in the borrowing of money needed to acquire/ purchase or create assets. In other words, it refers to all the costs associated with raising any type of finance for an entity’s own use. The cost of finances is recognized as an expense in the statement of income (profit or loss) over the period of the finances obtained.

This type of cost differs from an entity’s cost of capital, as the latter represents the overall finance cost relating to its capital structure, involving both equity capital and debt capital.

An entity’s costs of finances are those associated with its financial liabilities. As these costs are charged to the statement of income, the reported profit of the entity will be reduced. To the contrary, the dividends (distributed profits) paid on equity shares are treated as an appropriation of profit rather than an expense.

Cost of finances (COF) is also referred to as finance cost.