Definition of Cost
A cost might be an expense or it might be an asset.
Definition of Expense
An expense is a cost that has expired or was necessary in order to earn revenues. The matching principle guides accountants as to when a cost will be reported as an expense.
Example of a Cost
A company’s property insurance bill for the next six months of insurance shows a cost of $6,000. Initially the cost of $6,000 is reported as the current asset Prepaid Insurance (or Prepaid Expense) since the cost has not been used up (has not expired).
Example of an Expense
As a prepaid cost such as the $6,000 in the asset account Prepaid Insurance expires, the part that expires will be reported on the income statement as Insurance Expense. If the insurance cost is expiring at a rate of $1,000 per month, then each month the amount in the asset account Prepaid Insurance will decrease by $1,000 and Insurance Expense of $1,000 will be reported on the income statement.
