- In financial reporting cost refers to the amount of cash, resources, capital stock, services performed or liability incurred to obtain goods or services. This amount is usually monetized to a particular amount to get the value of goods and services obtained through the used up resources. There are two classes of costs: expired and unexpired costs. Expired costs refer to the costs that cannot be used up for future production while unexpired costs are those that can be used up in future production (AICPA, 1957). When it comes to financial statements, expired costs are deducted from the current revenue while unexpired costs are not deducted until they are used up. Examples of expired costs include cost of products and examples of unexpired costs include inventories and prepaid expenses.
- An expense refers to all expired costs that an entity has to deduct from its revenues. In financial statements, expenses are more specified and could be classified as operating expenses, administrative expenses, interests, taxes, or even costs of goods sold. Expenses can be used to refer to all the expired costs that entity incurs in the process of producing and offering goods and services to the market.
- A loss is different from a cost and an expense in that it refers to the excesses of all expenses. It is the excess of all expenses when an entity sells goods or services, when items are abandoned, when items are destroyed, or when items are written off. In other words, it is the excess cost or expired expenses that do not contribute to revenue production by an entity. This amount is considered as a loss because it is deducted from current revenues and does not benefit an entity. Examples of losses include the cost of goods that exceed the revenue from the goods, and the unrecovered book value from the sale of property.
- Cost of Goods sold – this is a cost because it refers to the resources or costs used to produce and process the goods sold by an entity. Cost of goods sold is expired cost because it is an already used up cost and is deductible from current revenue. It is recorded in the income statement as a cost and is deducted from the revenue within a reporting period.
- Bad debts expense – this is an expense because it is an expired cost that an entity incurs in the process of its operational activities. This item is also deductible from the revenue within a reporting period and can be classified as administrative or operational expense. Bad debts could also be classified as a loss if it is deducted from accounts receivables and when that cost does not contribute to revenue production.
iii. Depreciation expense for plant machinery – this is the reduction of the value of plant machinery until the time this asset gets to zero value. This depreciation expense is an expense because it is deducted from the current revenues of every financial year or reporting period of an entity. When an entity gets revenue from the goods and services produced by that machinery, then the depreciation is included in the cost of goods sold. However, if the machinery is not being used, the depreciation can be considered as a loss because the machinery is not bringing revenues to an entity (Schroeder, Clark & Cathey, 2016).
- Organization costs – these are costs that an entity incurs while creating a company or organization. Organization costs can be considered as costs because an entity uses resources or cash to set an entire business operation. Under GAAP, organizational costs are expenses that should be deducted from the current revenue within a reporting period as soon as they are incurred.
- Spoiled goods – these should be classified as costs as they are part of the cost of goods sold. Even though they do not directly bring revenues to an entity, they are produced together with other goods and services that bring revenue to an organization. However, if the spoiled goods are partially destroyed or just written off, then the goods should be considered as loss.
- Product costs are the costs that an entity incurs while producing goods or services. They are also known as inventoriable costs and are treated as inventories in the financial statements until the moment an entity manages to sell the goods and services produced by these product costs (FASB, 2004). After these goods and services are sold, they are considered to be part of goods sold. Product costs might include direct labor costs, manufacturing costs and direct materials costs.
- Period costs refer to the expenses incurred during production but are not product costs. These costs are usually not part of the manufacturing overhead but are accounted as expenses incurred during a particular period. Examples of period costs according to GAAP include administrative costs, marketing costs, depreciation of office building or plant machinery and advertising expenses. While inventories and raw materials and their costs are treated as product costs, the costs incurred to manage or run warehouses for these items are considered as period costs.