Cost vs. Expense: What's the Difference?

Young female artist in studio working on laptop
Photo: Gary Burchell / Getty Images

Costs and expenses are similar concepts, and they're sometimes used interchangeably, but there are some differences for businesses to consider. A cost typically refers to the price paid to acquire an asset, while an expense is an ongoing expense, such as an employee's salary or rent on a retail space.

What's the Difference Between Costs and Expenses?

Costs Expenses
Regularity Implies one-time purchase Ongoing payments like rent, utilities, etc.
Accounting Used to calculate assets Used to calculate profits
Taxes Don't directly affect taxes Can be tax-deductible


Cost is the amount that is paid to buy or obtain something. Cost implies a one-time event, like a purchase. The term "cost" is often used in business in the context of marketing and pricing strategies.

The term "expense" implies something more formal and something related to the business balance sheet and taxes. An expense is an ongoing payment, like utilities, rent, payroll, and marketing. For example, the expense of rent is needed to have a location to sell retail products from.


Accountants use cost to refer specifically to business assets, and even more specifically to assets that are depreciated (called depreciable assets). The cost (sometimes called cost basis) of an asset includes every cost to buy, deliver, and set up the asset, and to train employees in its use.


There is usually no asset (something of value) associated with an expense. Buying a building is a cost; the cost is the one-time price you pay. Paying interest every month on your mortgage for that building is an expense.

The cost of assets shows up on the business accounting on the balance sheet. The original cost will always be shown, then accumulated depreciation will be subtracted, with the result as book value of that asset. All the business assets are combined for the purpose of the balance sheet.


Expenses are used to produce revenue (seek profit) and they are deductible on your business tax return, reducing the business's income tax bill. To be deductible, they must be "ordinary and necessary" to the business.

Costs don't directly affect taxes, but the cost of an asset is used to determine the depreciation expense for each year, which is a deductible business expense. Depreciation is considered a "non-cash expense" because no one writes a check for depreciation, but the business can use it to reduce income for tax purposes.

Which Is Right For You?

Here are some situations in which it may make more sense to refer to "costs" rather than "expenses" (or vice versa).

When You Should Use Costs

Costs typically refer to the price paid to a producer or seller for a product you need. These costs can be fixed (consistent) or variable (fluctuating based on your sales volume, market conditions, or something else).


The term cost of goods sold refers to the calculation done at the end of an accounting year for businesses that sell products. The cost of goods sold measures all costs associated with sales.

Costs can be direct or indirect. Indirect costs include labor, storage costs, and the pay for factory or warehouse supervisors. Direct costs include:

  • Products bought for resale
  • Raw materials to make products
  • Packaging and shipping products to customers
  • Inventory of finished products
  • Direct overhead costs for utilities and rent for a warehouse or factory

For example, if a manufacturing business buys a machine, the cost includes shipping the machine, setting it up, and training employees to use it. Cost basis is used to establish the basis for depreciation and other tax factors.

When You Should Use Expenses

Expenses show up on your business profit and loss statement.


Keeping track of fixed and variable expenses can be helpful in determining the breakeven point for product pricing. More important, it's a budgeting tool to minimize fixed costs when times get tough.

You can also consider an expense as money you spend to generate revenue. For example, consider these expenses:

  • You need to spend money on advertising to get customers.
  • You need to spend money on a phone number so customers can call you.
  • You need to spend money on rent and utilities if you want to have a retail store for customers to visit.
  • You need to spend money on a web page to attract online customers.

Key Takeaways

  • Costs are related to buying business assets, and they're shown on the business balance sheet.
  • The cost of an asset is usually depreciated (spread over time).
  • Expenses are related to business expenditures over time, and they are shown on the business net income (profit and loss) statement.
  • Most ordinary and necessary business expenses are tax-deductible.

Frequently Asked Questions (FAQs)

What is opportunity cost?

Opportunity cost refers to the missed opportunity to pursue another option. This might not be a direct cost that you pay upfront. For example, the opportunity cost of working instead of going to school is that you miss out on an education. The opportunity cost of quitting your job so you can go to school is the loss of income from working.

What is the expense ratio in a mutual fund?

An expense ratio is a common way of letting investors know how much it costs to invest in a certain product (mutual fund, ETF, etc.). The ongoing expense is expressed as a ratio of the total investment. For example, if you have $1,000 invested in a mutual fund with an expense ratio of 0.05%, then you will pay $50 per year in fees.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Topic No. 704 Depreciation."

  2. Internal Revenue Service. "Topic No. 703 Basis of Assets."

  3. Internal Revenue Service. "Publication 535 Business Expenses," Page 3.

  4. Internal Revenue Service. "How to Depreciate Property," Page 3.

Related Articles