In accounting, the terms expense and cost mean different things, but they both refer to goods and services you’ve purchased for your business.
A product or service you’ve bought is considered an expense when you receive the payment request. When you pay, we call it a payment. When you use the product or service, it’s referred to as a cost. In other words, receiving goods or services is considered an expense, while using them is a cost.
This distinction is only relevant when you talk about bookkeeping. In any other context, you can use the words cost, payment and expense interchangeably.
Examples of cost vs. expense
Let’s look at some examples to make this a bit clearer. If you sign up for an online course and pay in advance, that’s considered an expense and a payment, and it is recorded as an expense and a payment in your accounts on the date that you received the payment request.
When the course takes place, you reclassify it as a cost.
This accounting shift from expense to cost can happen very quickly: If you buy lunch for the team, it’s an expense and a payment when you’ve paid, and a cost as soon as the lunch is over.
Why does it matter?
Recording expenses and costs in this way, reflects the actual financial status of your business. It shows that you’ve paid for things you’ve not yet made use of. This is called accrual accounting, and is part of the accounting principles.
You do the same for income and payments: You record income when you sell goods and services, but you register the actual payment on the date your client pays you.
If you find accounting confusing—and many small business owners, freelancers, and contractors do—you can consider hiring an accountant to take care of it for you.