Asset vs. Expense: Definition, Differences and Examples
Assets and expenses are both purchases that a business makes to conduct its operations. They differ in how you record them, what their purpose is and how much they cost. If you're an accountant or financial professional, it can be beneficial to learn more about what assets and expenses are and how they can affect a business' financial outlook. In this article, we explore what assets and expenses are, explain how to enter each into an accounting system and review asset and expense examples.
What is an asset?
An asset is a purchase that a business makes to support operations that typically costs more than $2,500. Depending on the business, they may set different caps on how much something must cost before it becomes an asset in the accounting system. Most assets are not liquid, meaning the business cannot quickly convert them to cash without affecting operations.
To be an asset, the purchase must maintain its worth for at least one year after acquisition. Depending on what the asset is, it may either depreciate or grow in value. Some assets, like land, likely do not depreciate in value. Others, like machinery, tools, vehicles, systems and buildings, likely do. When accounting for assets, financial professionals can create schedules to deduct the depreciation of assets.
What is an expense?
An expense is a purchase for the operation of a business that is usually less than $2,500. Unlike an asset, expenses do not maintain their worth for more than a year because the business usually consumes them immediately. Because of this, financial professionals deduct them right away rather than creating a depreciation schedule.
Accountants record expenses in the income, or profit and loss, statement. This shows how a business' profits compare to their expenses for a month or quarter. Examples of expenses can include rent, utilities, supplies, materials, insurance, entertainment and travel.
How to enter expenses into an accounting system
You can follow these steps to enter expenses into an accounting system:
1. Determine which accounting system you use
There are different accounting systems with rules regarding when the accountant should record the expenses, and understanding which accounting system you're using is important to ensure consistency. In the accrual accounting system, the accountant records the expense in the period it occurs. In the cash accounting system, the accountant records the expense at the point that the company actually makes the payment. Knowing which of these your company employs can allow you to record the expense at the right time.
2. Locate your income statement
The income statement, or profit and loss report, is the financial document in which accountants record expenses. The profit and loss report covers the expenses, costs and revenues for one business term. The expenses you can record here include administrative costs, development and research fees and expenses for selling and interest.
3. Record the expense as a debit to your cash account
After locating the profit and loss report, you can record the expense as a debit to your cash account. The amount you record should be exactly how much the expense cost. For example, if the company spends $2,000 on office supplies like paper, copier ink, pens and paperclips, you record that $2,000.
4. Track it as a credit to a liability account
Because you record expenses immediately and they don't hold their worth, you don't need to calculate depreciation like with assets. After you record the expense as a debit to the cash account, you can track it as a credit to the company's liability account. The reason you track both the debit and credit of the $2,000 expense is because of the double-entry bookkeeping principles.
How to enter assets into an accounting system
You can follow these steps to enter your assets into an accounting system:
1. Locate your accounting balance sheet
The balance sheet is a financial statement that records important information regarding an organization's net worth, capital and locations. It communicates financial status to owners, management and current and potential investors. The first step in entering your assets into your accounting system is locating this sheet, where you'll record assets like short-term investments, inventory, accounts receivable and prepaid expenses.
2. Debit the asset to a fixed asset account
The next step is to debit your asset to an account dedicated to the purchase of assets. To do this, determine how much the asset purchase cost. For example, if the business purchases machinery for $5,000, you can debit that amount to the fixed asset account.
3. Credit the asset to your cash account
After you debit the cost of the asset to the fixed asset account, you must balance it by crediting the same amount to the business' cash account. This is because the worth of the asset is now something that the business owns. For example, after debiting the fixed asset account for the $5,000 for the new machinery, you credit the same amount to the company's cash account.
4. Determine the asset's depreciation
Assets differ from expenses because, in many situations, you must determine the asset's depreciation for accounting purposes. To do this, you must establish how long the company plans to use the asset. For example, with the new machinery in the previous steps, the business may plan to use it for five years before purchasing new machines. This means you debit $1,000 per year to the depreciation expense and accumulated depreciation.
Asset vs. expense accounting examples
Take a look at these two examples to better understand the difference between assets and expenses:
A soda manufacturer purchases new bottling equipment for their factories. The new machinery costs them $45,000 in total. They expect to use these new bottling machines for at least nine years before they must purchase new ones. The accountant calculates the depreciation for these machines at $5,000 per year. They debit the asset to the fixed asset account and credit it to the cash account, and record the yearly deduction on the balance sheet.
The accountant for a large company is calculating the administrative expenses for the business term. They consider the labor, building costs, supplies, insurance, technology and maintenance costs when determining the total administrative expenses. For the period, the company spent $50,000 on administrative costs, including three administrator salaries at $10,000 each and $20,000 for a business conference and travel expenses. The accountant records these expenses on the profit and loss sheet, recording it as a debit to the cash account and a credit to the liability account.
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