Costs and costs - very often even financial professionals and economists confuse these almost identical terms. But a mistake in the term can cause serious problems in business finances. How do these two meanings differ?
Difference in terms
Cost, by definition, is a cost estimate of the production resources used by an organization. As for expenses, then, according to accounting, under them is determined the decrease in benefits to the economy during the reporting period, occurring in the form of depletion or outflow of assets. The costs are expressed in a decrease in the capital, which is in no way connected with its distribution among several owners.
These are vague definitions, but three conclusions about costs can be drawn from them. At expenses:
- Products are leaving the company.
- Products remain, but begin to decline in value.
- The products remain, but there is such an obligation to someone from the outside, because of which the company must part with them.
Now in more detail about these three situations.
Analysis of situations
Resources are leaving the company
A common case is when products are completed or finished products (service, work). A person sells a service, work or product, that is, he parted with it, and the resource left the company. Another option is the disappearance of values within the company, that is, theft.
Another interesting example is a fine that a company paid to another company or government.
Resources are lost at cost
Reducing the cost of any financial resources is possible for two reasons:
- Loss of the original characteristics and parameters of materiel items in the enterprise. For example, this is a new car with a working life of 4 years. But after 2-3 months the car got into an accident. It was restored, but it is clear that now it is not only not new, but it will not be able to work normally for its entire service life. The value has dropped, as has the cost due to costs.
- The second reason is already of a technical nature and is related to accounting. The bottom line is that accounting standards oblige accountants to evaluate the company's resources at the smallest value - cost at sale or cost. Therefore, if the cost in accounting is lower than the market value, accountants need to equalize the cost with the market one.
The emergence of obligations
For example, it might concern important products. The company sells a product and sells it to the buyer. After that, the rights are transferred completely to him. However, there are still no products in fact. For example, products that have already been purchased or ordered on a prepaid basis are still being made or tested.
These are the cases in which the product seems to be in the company and is located on its territory, but no longer belongs to it due to its obligations to customers. As a result, it can be noted that costs are the direct or indirect use of resources, while costs are the departure of these resources from the company.
