However, these payments do not have a lasting benefit for the business. Expenses are thereby helpful in determining and evaluating a company's overall performance. Expenses directly impact profitability ratios or the amount by which revenues or profits exceed the costs and expenses associated with doing business. These payments are important to a company's ability to generate revenues. While a cost is generally a one-time payment, an expense is best described as an amount paid regularly towards ongoing business operations. Over the long-term, though, most costs will inevitably become variable rather than fixed. The predictability that comes from this set-up can also help guarantee or increase a business' profitability early on by attaching a fixed revenue goal to the bottom line. Businesses often start with more fixed costs than variable costs. Because these costs rely on fluctuations in business activity, they are much less apparent in the short-term. Salaries, or fixed compensation amounts paid to employeesĪ variable cost is one that varies with changes to the business. equipment, vehicles)įixed interest rates incorporated into loan agreements A high fixed-cost level thereby requires a higher revenue level to avoid business losses at year-end. Fixed costs are deducted from a business' monthly gross income to yield a monthly net income or revenue. Instead, it is often connected to a fixed period of time, such as a rental lease or employee salary. There are two primary types of costs called “fixed” and “variable.” A fixed cost does not change over the short term, even if changes take place within the business. If the insurance policy is paid monthly, the monthly rate is considered an expense and the prepaid insurance treated as an asset will continue to decrease accordingly by the monthly rate paid. For example, a company's insurance bill when applied over the course of six months remains a cost until it has been used up or expired at the end of its term. It typically refers to a one-time payment for the purchase of a fixed asset or an asset procured for long-term use not quickly converted into cash like land, buildings and equipment.Ī cost can also refer to prepaid expenses, such as prepaid insurance. A cost is an amount paid to acquire an asset.
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