What Is the Key Difference Between Cost and Price?

If you’re new to running a business, it’s important to understand the key difference between cost and price. While these terms are frequently used interchangeably, they have very different meanings in financial statements. Misunderstanding or using these terms can lead to making accounting errors or wrong business decisions. 

In this article, we will bring you an overview of the key difference between cost and price and the factors that affect each, with a bonus of the most typical examples of cost and price. 

The key difference between cost and prices

In its most basic form, cost refers to the total expenses incurred to create a product or service, while price refers to the total amount a customer is willing to pay for a service or product.

Profit is the first difference between the costs incurred and the price paid. The price of any service or product is usually more than its cost because it includes the profitability and the cost of producing the item. 

The second difference between cost and price is that the cost of a product can influence its price. For example, if there is an increase in labor costs, businesses need to increase the price to earn profit. 

Market factors can affect both the cost and the price of every product. The difference here is that: While price fluctuations usually occur outside the business context, and you can do nothing about it, a business can lower the product price, which stays under its control, to minimize this effect. 

What are the factors that affect the price?

Two fundamental factors that significantly impact price are supply and demand.

Supply

Supply refers to the number of goods or services that the industry can deliver. It includes both visible and invisible products and services, such as cars, data entry, marketing, etc. Several times, the quantity is limited. This implies that only a limited amount of items and services are available at any given moment.

Demand

Demand refers to the market’s need for an item, whether tangible or intangible. Like supply, the number of consumers is limited. Demand may fluctuate depending on several factors, including affordability, the worth of an item, and the need for such products.

What are the factors that affect the cost?

The cost of a product is determined by two main factors: risk and inflation.

Risk

The cost of a product is directly impacted by risk. If the capital required to create an item is high-risk, the price will almost certainly be higher.

Inflation

Product prices are also affected by inflation. In most circumstances, financial institutions engage to maximize employees’ wages.

Furthermore, the supply of raw materials and other manufacturing necessities directly impacts the cost of an item. Products with scarce essential ingredients may have higher prices. Similarly, items with effortlessly natural ingredients have lower production costs.

Examples of cost and price

Here is a typical example of the difference between cost and price: If a T-shirt costs $20 to produce, its price must be higher than $20. Otherwise, the business cannot earn a profit on its sale. 

So, before determining the appropriate price for the T-shirt, the business first had to determine the cost of producing the T-shirt. This cost includes material expenses, labor expenses, location expenses, delivery expenses, etc. 

Another common example of cost and price is that costs are subtracted from prices to arrive at a business’s profit, either for individual products or in aggregate for the entire business. For example, if a company generates $1,000 of sales from its product prices and incurs $800 in costs, its profit is $200.

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The bottom line 

Though similar in everyday language, cost and price are related but different terms. It’s crucial to clarify the difference between cost and price, especially when it comes to conducting financial analysis or making investment decisions. By that, you will have a better understanding of how they impact a business’s financial profile and be able to make accurate business decisions.

Don’t forget to subscribe to the Shoeboxed blog if you’d like to discover more accounting and bookkeeping knowledge and best practices for small businesses! 

About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

The Accounting Cycle Explained: 5 Simple Steps

The accounting cycle is a must-know for all bookkeepers. It divides the entire process of a bookkeeper’s work into multiple steps. Though accounting software can help, small business accountants working on the books with less technical support should still know and use these processes manually. 

While other versions of the accounting cycle cover more detail, in this article, we’ll bring you an overview of the standard process that includes the five main steps needed to ensure the integrity of a company’s accounting process.

What is the accounting cycle?

The accounting cycle is a straightforward process for carrying out a company’s financial activities. It provides step-by-step directions for recording, examining, and analyzing a company’s financial activities.

The accounting cycle duration will vary depending on the reporting requirements. In general, most business owners strive to close their books on a monthly basis. On the other hand, some may prefer completing the accounting cycle on a quarterly or annually basis. 

What is the purpose of the accounting cycle?

The accounting cycle’s primary goal is to ensure that all the money coming into or going out of a business is accounted for and all financial records are accurate. While preparing financial reports, the accountant will examine accounting entries and processes to be aware of the business’s financial position day-by-day. 

Each step in the accounting cycle works as a check and balance along the way, preventing errors and inaccuracies from occurring in the previous step. Thus, the accounting cycle is an indispensable base or stepping stone for creating financial statements.

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What are the five steps of the accounting cycle?

Step 1 – Collect and analyze transactions

The first step of the accounting cycle is to collect documents of your business transactions, like receipts, invoices, bank statements, etc., for the current accounting period. These documents contain raw financial data that will then be entered into your accounting system before being converted into something meaningful.

You need to keep details of every transaction, including the date, amount, and location. Then, you’ll break down (or analyze) the purpose of each transaction. For example, if you received a receipt from Target, you’ll need to clarify if it was office supplies. If you received a gasoline bill, was it for the company vehicle? It’s essential to collect as detailed information as you can. 

Step 2 – Posting transactions to the general ledger

In the next step, you’ll use the general ledger to record all financial information gathered in step one. The ledger is a comprehensive, detailed list showing all your company’s transactions and how they affect each of its individual accounts. 

The ledger includes various journal entries, which chronologically document all of a company’s financial transactions. Journal entries must follow the rules of double-entry accounting. Whenever a transaction occurs, it must be recorded in the journal entries in two sections: a debit (to state what it’s going towards) and a credit (to state where your money is coming from).

After converting all of your business transactions into debits and credits, it’s time to move them into your company’s ledger. Keep in mind that uploading journal entries to the ledger as soon as possible helps ensure that the business’s records are always up to date. 

Step 3 – Preparing an unadjusted trial balance

You’ll prepare an unadjusted trial balance after posting transactions to the general ledger. The unadjusted trial balance gathers all of these totals together and calculates the total credits and debits in each of your business’s accounts. From that, you can determine individual account balances.

Here’s what an unadjusted trial balance looks like: 

The Accounting Cycle
Example of an unadjusted trial balance (Source: Wikiaccounting)

According to the double-entry accounting rules, all of a business’s credits must be equivalent to the total debits. If the sum of the debit balances isn’t equivalent to the sum of the credit balances, it means that either the step of recording or posting journal entries is incorrect. 

If you do bookkeeping with accounting software, this usually indicates that you entered information incorrectly. The process of searching for and fixing these errors is called correcting entries.

Step 4 – Preparing adjusting entries at the end of a period

You’ll prepare adjusting entries after you’ve finished correcting entries. Adjusting entries ensure that your financial statements only include data that is relevant to the time period you’re working on. There are four main types of adjustments, including deferrals, accruals, tax adjustments, and missing transaction adjustments.

Deferrals are revenues and expenses that have been received or paid in advance but have not yet been earned or used. For example, unearned revenue is money received for goods that have yet to be delivered.

Accruals are unpaid income and expenses that have not yet been recorded through a standard accounting transaction. For example, rent paid at the end of the month is an incurred expense, even though a business can occupy the premises at the beginning of the month if the rent is not yet paid.

  • Tax adjustments help you address expenses that lower your tax liabilities like depreciation and other tax deductions. For example, if you have spent a lot of money on new equipment, you may be able to deduct a portion of the cost this year. Once a year, your CPA will most likely guide you through the process.
  • Missing transaction adjustments allow you to account for financial transactions that you may have overlooked when bookkeeping, such as business purchases made on your personal credit card.

Step 5 – Preparing an adjusted trial balance

After posting all of your adjusting entries, it’s time to create an adjusted trial balance. This adjusted trial balance takes all of your adjusting entries into account.

The main purpose of the adjusted trial balance is to prove that all of your ledger’s credits and debits balance after all adjustments. Once you finish this step, you have all the information you need to start preparing your company’s financial statements!

The bottom line

Understanding the accounting cycle helps bookkeepers and small business owners simplify their accounting processes, and makes financial performance analysis more consistent, accurate, and efficient.

Subscribe now to the Shoeboxed blog for more helpful accounting and bookkeeping articles, success stories, entrepreneurship, DIY accounting, and the latest Shoeboxed product update! 

About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

Swift Passport Services: Paperless Accounting with Shoeboxed and ScanSnap

With Shoeboxed there has never been one “best” way to use our service to stay organized. And after processing over a billion dollars of expense data since 2007, we say that from years of firsthand experience!

Shoeboxed takes enormous pride in serving clients from around the country and across the globe, all of whom use our service in a myriad of ways to fulfill a whole host of organizational needs in both their personal and professional lives.

“Using Shoeboxed and ScanSnap together is a lifesaver … This process has saved us thousands of dollars a year in accounting fees.”

-Rob Lee

Shoeboxed Success Story Rob LeeIntroducing: Rob Lee

Profession: Owner, Swift Passport Services

Twitter: @SwiftPassport

LinkedIn: Swift Passport Services

Location: Chicago, Illinois

Shoeboxed: Hi, Rob! Please tell us a little about yourself and what Swift Passport Services does.

Swift Passport Shoeboxed CustomerRob Lee: I’m one of the founders of the company. We expedite US passports and international travel visas to virtually any country in the world; ones we see a lot are Brazil, Russia, China and India. We can get passports within one business day. We help both international business travelers and families going on tourist trips. The majority of our customers are business travelers and that’s our target customer because they tend to be repeat customers.

People come to us to outsource and expedite what is typically a long and sometimes confusing process. Once you come to us, we provide you with detailed instructions on how to get your passport done within one of seven timeframes depending on how quickly you need it. We’re an authorized third-party service — it’s a fairly big industry. There are 17 government agencies where you can get your passport across the country, but there are a few hundred of businesses like ours. Normal processing through the US government is 3-8 weeks to get a passport — our processing is much shorter.

SBX: Whoa, we didn’t know you could get passports that quickly! How did you get into the business of expediting passports?


Shoeboxed Success Story Swift Passport Services Customer Rob LeeRL:
 Well my wife is a former wildlife biologist and I used to be a forest and resource conservationist. We quit our jobs in Montana working for US Forest Service and moved abroad– fulfilling a shared dream. I taught English and she worked for a study abroad program. We lived abroad for a few years and used a company that is now one of our competitors to travel back and forth to the US. When we returned we ended up in Chicago with no plans and decided to start a business, thinking we would get to travel and help others travel. It’s been five years now and we’ve grown to four employees here in Chicago, two in New York and contractors all around the country.

SBX: What a great story, it sounds like you’ve had quite an adventure! Have you always wanted to operate a small business?

RL: No, it honestly just kind of fell into my lap. But it’s great to be your own boss, it’s very rewarding.

SBX: So at what point in your business venture did you start using Shoeboxed?

Shoeboxed User Swift Passport Services Success StoryRL: Well I have no business or accounting background. But as we started growing, I became responsible for the financial side of the business. We have an accountant, but I do the day to day receipt and expense tracking. Our receipts were in stacks and stacks and I just didn’t know what to do with them. I had a scanner and started scanning them, and then I googled receipt management services. I stumbled upon Shoeboxed and used the envelopes to get rid of all of them. The rest is history!

SBX: Excellent! How did you handle your tax filing before Shoeboxed, especially with all of those stacks of receipts?

RL: I just waited until quarterly tax time and then tried a series of different accounting solutions. But the main problem was that but I could never find the receipts I needed when I needed them. At first it was simple enough to manage but then we started having way too many receipts. We have to buy money orders for foreign consulate fees, so the number of documents related to that just got huge and we couldn’t keep track. Shoeboxed became our way to keep track.

Shoeboxed has absolutely saved us so much time — hours and hours. Now every receipt I get I quickly scan into Shoeboxed using our ScanSnap. From there I can easily export it into QuickBooks, which makes the whole process streamlined and simple. This process has saved us thousands of dollars a year in accounting fees.

SBX: That’s music to our ears! So you use our ScanSnap instegration. Can you walk us through your workflow?

RL: Sure. All the receipts always come to me. About once a week I’ll scan every receipt for that week using my ScanSnap. From my ScanSnap they go directly into the Shoeboxed Desktop Uploader and right into my online account, where all of the important information is pulled off. Come accounting time, if there’s any question about anything, I can hop online and find exactly what we need in seconds. Using Shoeboxed and ScanSnap together is a lifesaver.

SBX: Aren’t ScanSnap’s handy?! You also mentioned our QuickBooks integration. How was that been working for you?

RL: I started using the QuickBooks integration the minute it was available, probably about a year ago. I think it’s really easy to use!

SBX: Beyond our integrations, what’s your favorite thing about using Shoeboxed?

RL: Not having the clutter of receipts and all kinds of documents on my desk is really nice. It’s great to have them all organized in one place where I can access them from anywhere.

SBX: Do you have any organization tips for other small businesses?

RL: I’m not an organized person. Any way you can make things easier for yourself, I would recommend that. Definitely reduce paper clutter by any means possible– doing digital and paperless is great.

SBX: We agree, and think every small business owner would benefit from going paperless! Anything else?

RL: Shoeboxed is a great company with great software. I’m just really glad it exists!

SBX: That’s awesome, Rob.  Thank you! We’re honored to be apart of your business as it grows and wish you many years of continued success!

Are you a Shoeboxed user who has a success story and would like to be featured on our blog? Then we would love to hear from you! Please reach out to Emily at emily@team.shoeboxed.com for more information.

Until then, stay tuned… and stay organized!