What's the difference between a Cost and an Expense?

Can anyone explain the difference in a clear and concise manner?

Is an obligation a cost or expense?

Is paying for something a cost or an expense? .

Is something deferred a cost or an expense?

Is a contribution a cost or an expense?

What is a cost? and What is an expense?

A cost is a decrease in an asset account or an increase in a liability account. (This is a generalization, but it’s pretty good for our purposes; characterizing costs fully is surprisingly difficult.)

An expense is a negative amount that appears on the income statement.

For example:

  • If you buy a box of pencils for cash, that’s a cost (decrease in cash); if you deduct that cost on your income statement, it’s also an expense.
  • If you buy a machine by making a down payment and taking out a loan for the balance of the price, that’s a cost (decrease in cash, increase in a liability). You generally won’t show the entire cost on your income statement the first year, but you’ll show depreciation; the depreciation is an expense.
  • If you trade inventory for a new truck, that’s a cost (decrease in inventory); the expense will again likely be depreciation over a number of years.
  • And so on.