Costs vs. Expenses: What are the key differences in accounting?

Written by
Galih Gumelar
Last Modified on
October 21, 2024

Knowing the difference between costs and expenses is crucial for the preparation of accurate financial reports. While these two terms may seem similar at first glance, they are actually quite different in several ways. Let us dive into the differences in accounting and find out why understanding the two terms can make a big difference for your business.

What are costs?

Simply put, costs are the spending a company incurs to acquire or create assets that are used to produce products or services. Think of it as an investment the company makes today with the expectation that it will bring economic benefit in the future.

In the accounting world, costs are often referred to as "capital expenditures" or simply "costs" When a company incurs a cost, it reduces its capital but receives an asset in return, such as production machinery or office equipment. These assets can depreciate over time and depreciation is based on the original cost.

Examples of costs

Some examples of costs are the purchase of production machinery or the training of employees.

Suppose you buy a production machine. This machine is an asset and is recognized on the company’s balance sheet. 

The cost of the machine will later serve as the basis for calculating depreciation. This amount will eventually become an expense that the company must recognize in later accounting periods.

Types of costs

There are generally two types of costs that a company has to deal with: Fixed costs and variable costs.

1. Fixed costs

Fixed costs are constant expenditures that the company pays regardless of how much sales increase or decrease. These costs remain constant over time. The property tax for a company building, for example, is a fixed cost.

2. Variable costs

Variable costs fluctuate depending on the company’s level of production or turnover. The amount and timing of these costs can vary. The purchase of a new production machine when turnover increases is an example of a variable cost.

What are expenses?

Expenses are the outlays a company makes to maintain its daily operations. Expenses ensure that revenue flows and the company can make a profit.

In accounting, expenses reduce the company’s revenue and ultimately affect the calculation of net profit. For this reason, expenses are an important part of the financial reports and must be accurately recorded in the income statement.

Examples of expenses

Examples of expenses include employee salaries, utility bills and marketing costs.

For example, imagine your company earns Rp5,000,000 per month. If you spend Rp2,500,000 on electricity and advertising, your net profit will be Rp2,500,000:

Rp5,000,000 - Rp2,500,000 = Rp2,500,000

Types of expenses

Expenses are generally divided into two categories: Fixed expenses and variable expenses.

1. Fixed expenses

Fixed expenses are regular, consistent costs that do not depend on production or sales volume. These are expenses that are incurred regardless of how many products you sell, such as rent or employee insurance.

2. Variable expenses

Variable expenses, on the other hand, rise and fall depending on how much you produce or sell. Examples of this are costs for the distribution of products or sales commissions.

3 Main differences between cost and expense

Although many assume that costs and expenses are the same thing, they actually differ in key ways. Here are the three most important distinctions:

Purpose of Expenditure

The first and most fundamental difference is the purpose behind the expenditure.

  • Cost refers to money that is spent with the goal of a future benefit, like an investment. It is usually a one-time expenditure that results in an increase in the company’s revenue.
  • Expenses are money spent to maintain the operation of the business and generate profits. Operating expenses are smaller than costs, but are essential to day-to-day operations.

Position in the financial statements

Costs and expenses also differ in where they appear in financial reports.

  • Costs are listed as assets on the balance sheet and represent something that has not yet been used and offers a future benefit.
  • Expenses, on the other hand, are recorded in the income statement as a deduction from net profit and represent money that has already been spent but has no benefit for future periods.

Accounting period

A further distinction lies in the accounting periods.

  • Costs extend over several accounting periods (usually one year) as they relate to long-term investments, such as the purchase of assets that improve the efficiency of the company.
  • Expenses, on the other hand, are counted within a single period (usually less than one year) and are considered one-time expenditures that provide a direct benefit in that period.

Example of cost and expense entries

To better understand costs and expenses, let’s look at some accounting examples.

Suppose you buy a production machine to manufacture fabric, your company's main product. You buy the machine for Rp300 million with an estimated depreciation of 5% per year. How should you account for it?

You should record the total price of the machine, which is Rp 300 million, as a cost. This is only recorded once when the machine is purchased.

The declining balance method is used for depreciation in this example. With a depreciation rate of 5% per year, the depreciation expense in the first year would be 5% of Rp300 million or Rp15 million. This expense must be recognized annually until the value of the machine is exhausted and it can no longer be used.

Another example: You buy a production machine and pay your employees to operate it. The purchase of the production machine is recorded as a cost, a one-off expense. In the meantime, the employees' wages for operating the machine are recorded as expenses, and you must record these expenses regularly according to the employees' monthly salaries.

Manage costs and expenses effectively with Aspire Expense Management

Managing costs and expenses is an essential task to ensure the financial health of the company. To be more efficient, you can manage your company's costs and expenses with Aspire Expense Management

With just one platform, you can manage and control your company's expenses and integrate these data into your accounting software. In addition, you can also set budgets, control, and monitor expenses easily in real-time, preventing you from overspending at the end of the period.

Want to know how Aspire can help you manage your business finances? Contact our team now!

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Frequently Asked Questions

How can Aspire support the unique financial needs and challenges of mid-sized businesses?

Aspire offers a comprehensive suite of expense management solutions tailored for mid-market companies. This includes sophisticated corporate cards, advanced budget controls, and streamlined claims and approval policies, all designed to enhance financial efficiency.

How quickly can a mid-market company integrate Aspire's solutions into existing systems and workflows?

Integration with Aspire's expense management solutions is swift and seamless. Mid-market companies can swiftly implement corporate cards with tailored features, set up nuanced budgets, and establish streamlined claims and approval processes, ensuring minimal disruption to existing workflows.

How does Aspire compare to competitors for international money transfers?

Aspire excels in international expense management with FX fees up to 2x cheaper than traditional banks.

Global payments are offered by various providers through business accounts. Read our article to know more about types of business accounts and how to choose the best one for your business. There are many banks and fintech companies offering business accounts to businesses in Singapore. We have covered them all in our blog, you can click the links to view accounts offered by various banks such as DBS, OCBC, Maybank etc.

However, if you are a start-up or a growing business, chances are you may not meet the eligibility criteria for most of these banks or find their charges to be expensive for your liking. You can consider opting for Aspire multi-currency account for global payments which offers you all the benefits, with eligibility criteria which are less stringent. Read our article on bank charges in Singapore for a quick and easy comparison.

What level of customization does Aspire offer to meet the specific financial requirements of mid-market clients?

Aspire understands the diverse financial needs of mid-market clients and provides a high level of customization to tailor solutions accordingly. This includes the ability to customize corporate cards with specific spending limits, rewards, and benefits that align with the unique requirements of each client.

Additionally, Aspire's budgeting features are adaptable to accommodate the distinct financial structures of mid-market enterprises. The platform also allows for fine-tuning approval policies, ensuring they align with the specific workflows and compliance standards of individual mid-market businesses. This commitment to customization empowers mid-market clients to optimize their expense management in a way that best suits their financial goals and operational preferences.

Is there a minimum balance required for Aspire Business Accounts?

No minimum balance is required to keep your SGD, USD, EUR, GBP and IDR Accounts activated.

Can Aspire's corporate cards be customized to cater to the specific needs of consulting teams on the go?

Yes, Aspire's corporate cards are highly customizable. Consulting teams can benefit from tailored spending limits, travel-centric perks, and real-time transaction tracking, ensuring that the cards meet the unique requirements of professionals on the move.

How does Aspire support budget management for consulting projects and travel expenses?

Aspire's platform offers sophisticated budget controls that consulting companies can adapt to project-specific needs. This includes setting project budgets, tracking expenditures, and receiving real-time insights to ensure that expenses align with project goals.

What are Aspire Corporate Card FX rates?

At Aspire, we want you to pay the lowest rates in the market.
- Zero card activation fees
- Zero card transaction fees
- Best FX rates, up to 2x cheaper than banks

How does Aspire help consulting companies enforce expense policies and approvals for travel expenses?

Aspire streamlines the claims and approval process, allowing consulting companies to establish and enforce expense policies seamlessly. Customizable approval workflows ensure compliance with company policies and industry regulations.

Is Aspire's platform scalable for consulting companies of varying sizes?

Yes, Aspire's platform is scalable and caters to consulting companies of all sizes. Whether you're a boutique consultancy or a larger firm, the platform's features can be adapted to meet your specific travel and expense management needs.

How can I open a business account in Singapore?

For a business account in Singapore, Aspire is an excellent choice. With a focus on startup and SME needs, Aspire offers a seamless and transparent banking experience.

Benefit from their user-friendly online platform, no minimum balance or account opening fees, and dedicated support for businesses of all sizes.

Aspire is designed to streamline your financial management, making it an ideal partner for entrepreneurs in Singapore.

How long does it take to open an Aspire business account?

Registration with Aspire takes less than 10 minutes which you can do via our website or mobile app.

Once registered, we will get back to you within 5 business days on whether your account has been activated or if we need further documents from you.

Our account verification process varies according to the nature of your business. In exceptional cases, it can take up to 7 days to process your documents.

How can Aspire's corporate cards benefit my startup?

Aspire's corporate cards offer a range of benefits for your startup. Earn 1% unlimited cashback on qualified spends, simplify expense management, enjoy streamlined transactions, and gain real-time insights into spending. With customizable limits, integration with accounting software, and enhanced security features, Aspire's corporate cards are designed to empower your startup's financial efficiency and provide added convenience for your team.

Is Aspire suitable for both early-stage and established startups?

Absolutely, Aspire caters to the needs of both early-stage and established startups. Whether you're just beginning your entrepreneurial journey or have an established business, Aspire offers tailored financial solutions to help streamline your operations.

From managing expenses and optimizing workflows to providing valuable financial insights, Aspire's platform is designed to adapt and scale with your business as it grows. The flexibility and scalability of Aspire make it a suitable choice for startups at various stages of development.

Is there a minimum balance required for Aspire Business Accounts?

No minimum balance is required to keep your SGD, USD and IDR* Accounts activated.

However, we recommend keeping your subscription plan amount available on your balance to ensure you're up to date with your payment every month.*

To create a recipient or make any transaction on your IDR Account, you'll need to have a minimum balance of IDR 10,000 on your account.

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Galih Gumelar
is a seasoned writer specialising in macroeconomics, business, finance and politics. With a writing history at CNN Indonesia, The Jakarta Post, and various other reputed organisations, Galih leverages his broad range of experiences to create insightful resources for those wanting to start a business.
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