What is a Cost in Accounting?

A cost is what you give up to get something else. At the grocery store, you give up cash to get groceries. When deciding to go to college, you give up time and money to get a degree or the benefits of having the degree: more money, a better job, advancement of your personal goals.

In business, we give up cash to purchase a piece of equipment because we want the benefit of increasing production to make more revenue. We pay employees to get the benefit of their labor.

A cost is a tradeoff. We give “this” up because we want “that.”

In accounting, as in any part of life, a cost is something you give up to get something, some desired benefit. The tracking and categorizing of costs is a big part of what accounting professionals do day-to-day.

In Financial Accounting class (also known as Accounting Principles), we track and categorize costs to track whether we are making a profit, and to understand the relationships between items like revenue and expenses.

For example: If revenue (our sales) goes up, what happens with expenses? Do they go up, down, or stay the same?

In Managerial Accounting class, our job is to slice, dice, and combine different costs to get a better understanding of the nitty gritty, day-to-day operations.

For example: If we produce 1,000 more units of product, what impact will that have on material and labor costs.

Understanding how costs impact the daily operations of a business, contributes greatly to financial success of a business.

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

Recent Posts