Discussion Board Forum 3
Case 5-4: Cost, Expense, and Loss
ACCT 632-D02
Dawn Livingston
Explain the meanings of (1) Cost, (2) expense, and (3) loss as used for financial
reporting in conformity with U.S. GAAP. In your explanation, discuss the
distinguishing characteristics of the terms and their similarities and interrelationships.
“Cost is the expenditure required to create and sell products and services, or to
acquire assets” (Bragg, 2017). Costs can be known as unexpired assets, which are utilized to
benefit a company in the future (Schroeder, Clark & Cathey, 2017, p. 150).
“A loss is an excess of expenses over revenues, either for a single business
transaction or in reference to the sum of all transactions for an accounting period” (Bragg,
2017). When an asset becomes a liability instead of a profit, it becomes a loss. The asset is
considered expired and not an expense (Schroder, et. al, p. 150).
An expense is an outflow “of assets or incurrences of liabilities during a period from
delivering or producing goods, rendering services, or carrying out other activities that
constitute the entity’s ongoing major operations” (p. 150).
Classify each of the following items as a cost, expense, loss, or other category, and
explain how the classification of each item may change:
-Cost of goods sold: expense
A cost of goods sold is costs that are used to create a product or service. “As the
inventory gets sold (or used up), the cost expires, which results in an expense” (p. 150).
-Bad debts expense: loss
Bad debts are referred to a loss that a company will incur if the goods sold did not receive
immediate payment (Averkamp).
-Depreciation expense for plant machinery: expense
Depreciation allocates the cost of the plant machinery by expensing it over its estimated
useful life (Australian National University).
-Organization costs: expense
These expenses are incurred when someone spends to setup a business.
-Spoiled goods: loss
This meaning is when a good has been spoiled or destroyed that cannot be repaired
(Basic Accounting Lectures, 2009).
The terms period cost and product cost are sometimes used to describe certain items in
financial statements. Define these terms and distinguish between them. To what types of
items does each apply?
Product costs “are cost expirations that can be directly associated with the company’s
product, such as direct material, direct labor, and directory factory overhead (Schroeder, et. al, p.
150). Product costs can be categorized as an inventory and charged to the cost of goods sold and
will appear as an expense on an income statement (Bragg, 2017).
Period costs are costs that are directly related to the time a product was created not to the
product (Schroeder, et. al, p. 150). These costs can be identified as selling expenses, advertising
expenses, and commissions to name a few (Bragg, 2017). These can also be included in the cost
of goods sold and show on the income statement (Bragg).
Knowing what costs, expenses, and losses are helps an auditor give the best answer to a client.
God also gives us knowledge to give the best possible answer when performing a service.
Proverbs 4:7 NIV says, “The beginning of wisdom is this: Get wisdom. Though it cost all you
have, get understanding.” The understanding of what each one of these terms represent helps the
auditor understand what the company has done as far as an asset or expense.
References:
Averkamp, H. (n.d.). What is Bad Debts Expense? Retrieved from
https://www.accountingcoach.com/blog/what-is-bad-debts-expense.
Bragg, S. (2017). Cost. Accounting Tools: Accounting CPE Courses & Books.
https://www.accountingtools.com/articles/2017/5/4/cost.
Bragg, S. (2017). Expense. Accounting Tools: Accounting CPE Courses & Books.
https://www.accountingtools.com/articles/2017/5/6/expense.
Bragg, S. (2017). Loss. Accounting Tools: Accounting CPE Courses & Books.
https://www.accountingtools.com/articles/2017/5/13/loss.
Bragg, S. (2017). Product Costs. Accounting Tools: Accounting CPE Courses & Books.
https://www.accountingtools.com/articles/what-is-a-period-cost.html.
Bragg, S. (2017). Period Costs. Accounting Tools: Accounting CPE Courses & Books.
https://www.accountingtools.com/articles/what-is-product-cost.html.
Defective and Spoiled Goods: What is the Difference in Defective Goods and Spoiled Goods?
(n.d.). Published by Basic Accounting Lectures.
http://accountinglectures.com/defective_and_spoiled_goods.html.
Property, Plant and Equipment - Depreciation Principles. (n.d.). Published by Australian
National University. https://services.anu.edu.au/financial-management/assets/property-plant-and-
equipment-depreciation-principles.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2017). Financial Accounting Theory and
Analysis: Text and Cases (12th ed.). Hoboken, NJ: Wiley.
