Question

. Explain the meaning of (1) COST, (2) EXPENSE, and (3) LOSS as used for financial reporting in conformity with generally accepted accounting principles. In you explanation discuss the distinguishing characteristics of the terms and their similarities and interrelationships.

Answer 1

Cost is the amount that is given in consideration of goods that are either received or are to be received at a future point of time.

Expenses are outflows and using up of assets. It also includes incurrences of liabilities that occur during a period due to production of goods and rendering of services. Expenses are thus outflows related to carrying out activities that are part of the primary operations of a company.

Loss is a decrease in equity that occurs from peripheral and incidental transactions.

In terms of similarities and interrelationships expenses are revenue producing cost expirations while losses are non-revenue producing cost expirations. For example a cost is incurred when a company purchases an asset like inventory. Cost expires when inventory is sold and an expense is booked under the head cost of goods sold. An expense is recognized as sale of inventory results in revenue.