If It Cost That Much It Must Be an Expense!
In the world of the small business owner there are costs and expenses right? You probably think you have your sales, cost of sales and then those nasty expenses you have to pay. While you’d be somewhat right, that’s not the only difference between costs and expenses.
When considering what is the difference between cost and expense, let’s look at a small business scenario:
John owns a candle shop that sells import candles. He knows the holiday season is near so John orders $500 worth of candles to cover the holiday season. He may not sell the entire inventory, but he doesn’t want to run out either, so he places $100 worth of candle inventory in his warehouse—this becomes an asset.
Once the holiday season is over, John has sold $400 of inventory which is his expense, the remaining $100 becomes an asset, and $500 was his cost.
In the world of financial accounting and journal entries, your debits and credits must equal, hence:
- Cash out – Credit of $500 (this is his cost)
- Sales – Debit of $400 (this is his expense)
- Inventory - $Debit of $100 (this becomes an asset in inventory)
If you’re still confused, here are more examples of the difference between cost and expense.