Managerial accounting and sustainability accounting are interchangeable terms.

The difference between cost and expense is that cost identifies an expenditure, while expense refers to the consumption of the item acquired. These terms are frequently intermingled, which makes the difference difficult to understand for those people training to be accountants. A key reason why a cost is, in practice,  frequently treated exactly as an expense is that most expenditures are consumed at once, so they immediately convert from a cost to an expense. This situation arises with any expenditure related to a specific period, such as the monthly utility bill, administrative salaries, rent, office supplies, and so forth.

Unfortunately, cost and expense tend to be used interchangeably even within the accounting terminology. The master glossary of the accounting standards codification that is maintained by the Financial Accounting Standards Board does not define either term; consequently, the following definitions are derived from common usage.

Definition of Cost

Cost most closely equates to the term expenditure, so it means that you have expended resources in order to acquire something, transport it to a location, and set it up. However, it does not mean that the acquired item has yet been consumed. Thus, an item for which you have expended resources should be classified as an asset until it has been consumed. Examples of asset classifications into which purchased items are recorded are prepaid expenses,  inventory, and fixed assets.

Example of Cost

The cost of an automobile may be $40,000 (since that is what you paid for it) and the cost of a product you built is $25 (because that is the sum total of the expenditures you made to build it). The cost of the automobile likely includes sales taxes and a delivery charge, while the cost of the product probably includes the cost of materials, labor, and manufacturing overhead. In both cases, you have expended funds to acquire the automobile and the product, but have not yet consumed either one. Accordingly, the first expenditure is classified as a fixed asset, while the second one is classified as inventory. Similarly, an advance paid to an employee is classified as a prepaid expense.

Definition of Expense

Expense is a cost whose utility has been used up; it has been consumed. For example, the $40,000 automobile you purchased will eventually be charged to expense through depreciation over a period of several years, and the $25 product will be charged to the cost of goods sold when it is eventually sold. In the first case, converting from an asset to an expense is achieved with a debit to the depreciation expense account and a credit to the accumulated depreciation account (which is a contra account that reduces the fixed asset). In the second case, converting from an asset to an expense is achieved with a debit to the cost of goods sold and a credit to the inventory account. Thus, in both cases, we have converted a cost that was treated as an asset into an expense as the underlying asset was consumed. The automobile asset is being consumed gradually, so we are using depreciation to eventually convert it to expense. The inventory item is consumed during a single sale transaction, so we convert it to expense as soon as the sale occurs.

Another way of thinking of an expense is any expenditure made to generate revenue under the matching principle, which was particularly apparent in the last case, where inventory was converted into an expense as soon as a sale occurred. Under the matching principle, you recognize both the revenue and expense aspects of a transaction at the same time, so that the net profit or loss associated with the transaction is immediately apparent. Thus, a cost converts to an expense as soon as any related revenue is recognized.

Finance and accounting are terms often used interchangeably. While both are related to the administration and management of an organization’s assets, each contains major differences in scope and focus. When it comes to evaluating and strategizing the financial health of your company or department, it’s important to have a working knowledge of both disciplines.

To understand the difference between finance and accounting, you need to know what each term means.

What Is Finance?

Finance refers to the ways in which a person or organization generates and uses capital—in other words, how a given party manages their money. This often encompasses activities such as investing, borrowing, lending, budgeting, and forecasting.

The field of finance can be broken down to hone in on the specific types of parties involved, including personal finance, corporate finance, and public finance. While these categories typically include a similar set of activities, each type of finance has nuances that reflect the different regulations, considerations, and concerns of each population.

Related: 5 Reasons Why You Should Study Finance

What Is Accounting?

Accounting, on the other hand, refers to the process of reporting and communicating financial information about an individual, business, or organization. Rather than making strategic financial decisions, accounting captures an accurate snapshot of a party’s financial position at a specific point in time—a practice that results in the information that finance activities are generally based upon.

The typical activities involved in accounting include recording transactions, collecting financial information, compiling reports, and analyzing and summarizing performance. The results often include thorough financial statements—including income statements, balance sheets, and cash flow statements—that are used to understand an organization’s position at a given time.

Related: How to Prepare a Balance Sheet: 5 Steps for Beginners

Accounting is often broken down into two segments: Managerial accounting and financial accounting.

The main difference between managerial and financial accounting lies in the organization and presentation of information. Managerial accounting focuses on internal accounting processes and generates reports that are referenced by management, while financial accounting focuses on aggregating information into financial statements for both internal and external use.

To help elevate your business fluency, here’s a look at the differences between finance and accounting.

The Differences Between Finance and Accounting

1. The Scope and Focus

Finance and accounting operate on different levels of the asset management spectrum. Accounting provides a snapshot of an organization’s financial situation using past and present transactional data, while finance is inherently forward-looking; all value comes from the future.

Accounting

In accounting, insight into a firm’s financial situation is gained through the “accounting equation,” which is: Assets = Liabilities + Owners' Equity.

This formula looks at what a company owns (its assets), what it owes (its liabilities), and the residual that belongs to shareholders (owner’s equity). And it must balance out—the assets on the left should equal the claims against those assets on the other side. It’s a fundamental means for determining whether a company’s financial records accurately reflect the transactions carried out over a period of time.

Finance

When assessing performance through the lens of finance, cash is king. Unlike accounting’s reliance on transactional data, finance looks at how effectively an organization generates and uses cash through the use of several measurements.

Free cash flows is arguably the most important one, which examines how much money a company has to distribute to investors, or reinvest, after all expenses have been covered. It’s a strong indicator of profitability, and can be used to make present-day investment decisions based on an expectation of future payoff.

Related: Finance for Non-Finance Professionals: 14 Terms You Need to Know

2. Measuring Financial Performance

This difference in scope underscores a contrast between the underlying principles of accounting and finance.

Accounting

The accrual method of accounting, which is followed by most organizations, records transactions as they are agreed upon, as opposed to when they are completed. It allows for transactions to be made with credit or deferred payments, and operates under the idea that revenues and costs will smooth out over time to more accurately depict economic reality. This makes it possible to compare year-on-year growth of a company’s revenues, costs, and profits without factoring in one-off events, as well as seasonal and cyclical changes.

Finance

Finance rejects that idea, instead believing that the best way to measure economic returns from a company is to calculate the cash it’s able to produce and leverage, which is dependent on when that cash is exchanged—rather than just agreed upon.

3. Assessing Value

Another point of difference between the disciplines is their approach to value.

Accounting

In accounting, a conservatism principle is often applied, which suggests that companies should record lower projected values of their assets and higher estimates of their liabilities. Under this doctrine, if you don't know the value of something precisely, you count it as zero. Doing so helps businesses avoid overextending themselves by underestimating the value of assets and overestimating the liabilities that they owe.

Finance

This is handled much differently in finance, which employs an analytical process, known as valuation, to determine the worth of a company, project, or asset. The gold standard is discounted cash flow analysis, which is applied to a series of cash flows over a period of time. The discount rate (represented as a percentage) accounts for opportunity cost, inflation, and risk, and brings the value of a future stream of cash to its present value.

Related: How Do Companies Keep Track Of Their Monies?

Finance or Accounting: Which Is Better for You?

Both finance and accounting are highly valuable for assessing a company’s position and performance. By understanding the underlying principles of the two disciplines and how they contrast, you can develop greater financial intuition and make better business decisions.

If you’re trying to decide which area you need to brush up on, consider how you can apply these skills.

For those who want to better understand their organization’s financial performance in the context of the markets and contribute to financial strategy, exploring the fundamentals of finance can be beneficial. If you’d like to learn more about the mechanics involved in your organization’s finances and what impacts them, learning the basics of financial accounting, improving your financial literacy, and developing accounting skills can help you reach your goals.

If you’re considering pursuing a finance-related career, taking the time to develop a foundational knowledge of key finance and accounting principles can prepare you for success as you pursue a formal education in your desired discipline.

In either case, developing your financial acumen is key to making better business decisions. From deciding where to invest and how to allocate resources, to understanding the financial health of your organization, or even making the case for a project, many of the business decisions professionals face daily are rooted in finance and accounting.

Do you want to take your career to the next level? Download our free Guide to Finance and Accounting to explore the financial skills all managers need. Or, consider enrolling in our online courses Financial Accounting and Leading with Finance, and discover how you can unlock critical insights into your organization’s performance, potential, and financial goals.

This post was updated on April 19, 2022. It was originally published on June 27, 2019.

What is managerial accounting also called?

Is management accounting and managerial accounting the same?

Can cost accounting and management accounting be used interchangeably?

What is a similarity between managerial accounting and financial accounting?