What is the difference between cost and expense PDF

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What is the difference between cost and expense? 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.

What is a temporary account? Definition of Temporary Account A temporary account is a general ledger account that begins each accounting year with a zero balance. Then at the end of the year its account balance is removed by transferring the amount to another account. This is done through closing entries. Temporary accounts are also referred to as nominal accounts.

All of the income statement accounts are classified as temporary accounts. A few other accounts such as the owner's drawing account and the income summary account are also temporary accounts.

Examples of Temporary Accounts Temporary accounts include all of the various groups of income statement accounts: 

Revenues

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Expenses

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Gains

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Losses

Having temporary income statement accounts makes for easy reporting of each year's details. After the amounts for the year have been reported on the income statement, the balances in the temporary accounts will end up in a permanent account such as a corporation's retained earnings account or in a sole proprietor's capital account. (In a manual system, the balances in the income statement accounts will first be closed to an income summary account. Next, the income summary balance will be transferred to the corporation's retained earnings or to the sole proprietor's capital account.)

A temporary account that is not an income statement account is the proprietor's drawing account. The balance in the drawing account is transferred directly to the owner's capital account and will not be reported on the income statement or in an income summary account.

What is a capital account? Definition of Capital Account In accounting and bookkeeping, a capital account is a general ledger account that is part of the balance sheet classification: 

Owner's equity (in a sole proprietorship)

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Stockholders' equity (in a corporation)

Examples of Capital Accounts The sole proprietorship of J. Lee will include the following capital accounts: 

J. Lee, Capital, which is increased by J. Lee's investment into the business plus each accounting period's net income, and which is decreased by the debit balance in the account J. Lee, Drawing

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J. Lee, Drawing, which is a temporary account that records the proprietor's draws during the year. At the end of the year, the account's debit balance will be closed to owner's capital account

A corporation will likely have the following capital accounts: 

Paid-in capital accounts such as Common Stock, Preferred Stock, Paid-in Capital in Excess of Par, which are used to record the amounts received by the corporation when shares of its capital stock were originally issued to investors.

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The account Retained Earnings which consists of the amount of the corporation's earnings since the corporation was formed minus the dividends distributed to the stockholders since the corporation was formed.

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The account Treasury Stock, which has a debit balance representing the amount paid by the corporation to repurchase its own shares of stock which it did not retire.

Other Information on Capital Accounts The total of the balances in all of the capital accounts must be equal to the reported total of the company's assets minus its liabilities. Because of the historical cost principle and other accounting principles, the total amount reported in the capital accounts will not indicate a company's market value....