Assets vs. Expenses

Many Crates, One DrinkPeople often confuse assets with expenses.  This is because both assets and expenses use up your funds – these are things you can spend money on.

Assets provide a future benefit to your business.  They help bring in future revenues and profits.  Assets appear on the balance sheet.

For example, inventory is an asset.

Expenses are the cost of bringing in revenues.  They were needed to bring in the revenues and profits that you reported this year.  Expenses appear on the income statement.

For example, just as inventory is an asset, “cost of goods sold” is an expense.  This is the cost of inventory that was sold during the year.

The difference is really one of timing.  An asset is expected to bring in a benefit sometime in the future.  When the benefit comes in, then the asset becomes an expense.

As it is sold, inventory is moved out of the inventory account on the balance sheet, and into the cost of goods sold account on the balance sheet.

Sometimes, an asset can lose value without ever providing a benefit.  This would be considered a loss, which is, like an expense, deducted in the income statement.

Suppose inventory is somehow damaged or rendered obsolete.  Then it would be recorded as a loss on the income statement.

Please note that definitions of assets and expenses for financial accounting often differ from their definitions for taxation purposes.  A legitimate expense on your income statement might not be deductible on your tax return.

17 thoughts on “Assets vs. Expenses

  1. So, if I am a contractor and I buy a special tool do get a job done or to take on future work, is this an asset or an expense?

  2. It is appropriate time to make some plans for
    the future and it’s time to be happy. I have read this post and if I could I wish to suggest you some interesting things or advice. Maybe you can write next articles referring to this article. I want to read more things about it!

  3. Hi Mark,
    Thank your for your information.
    I need your help to understand and get more help on GNUCASH software.
    I am using GnuCash for my bookkeeping. I have question regarding entering the Expenses
    Q1. In GnuCash when I record Expense then Its asking me to select the Transfer account.I am not sure what to select in that column.
    Q2. How to record the credit card purchases in the GnuCash

    Please help me regarding this.
    Thanks
    Venkat

    • The transfer column would be how you are paying for the expense – cash, the checking account, or accounts payable.
      For credit card purchases, make sure you have a liability account for your credit card. For each purchase, increase this liability and “transfer” to the relevant expense account.
      (Sorry this response is a year late!)

  4. Hi Mark, great resource thanks.

    I will be using your accounts spreadsheet to replace my old excel spreadsheet I did but I need some help.

    I need to track my assets for examples parts I sell and equipment I have purchased to do the work. Do I need a separate asset inventory spreadsheet detailing all this and how and where do I list these assets, only when I sell them or use them?

    Also, can I use your spreadsheet for the entire years accounts or does it make sense to do a spreadsheet for each month ?

    Your help greatly appreciated.

    Thanks

    Socrates (U.K)

    • Socrates, this spreadsheet doesn’t have asset or inventory management. I found that this would make the spreadsheet considerably more complex and more difficult to use.
      To use this spreadsheet with asset or inventory management, list asset purchases as “other expense.” Then keep a running total of your assets in another worksheet. Alternatively, you may be better off using a more complete software package. GnuCash would work, and it’s free.

      • Hi Mark

        Thanks for the reply. Sorry two more questions (Now I sound like Columbo) . How can I add extra input columns next to sales, returns & allowances to include the formulas and that it shows up in the report sheet?

        And… how would I input/show capital introduced, so additional cash I inject into the business? Would I show it as other income and note it as capital introduced?

        The reason why I haven’t used a more complicated accounts software because I love the ease of use of your spreadsheet and it does the job,

        Thanks again for your help

        Socrates

        • Speaking of old TV, I’m going to sound like Scotty on Start Trek: “I’m given’ her all she’s got, Captain!” If you try to do too much with this spreadsheet, it will give you more trouble than it’s worth, and your data will get screwed up. Keep it simple.

          Instead of adding a new column, change the name of one of the existing columns. But if you must add a new column, then you need to insert a row into the report page, and enter a cell reference in the report page for the total of that column. When inserting columns, insert them between rows I and AE.

          Also, before you fool around with this, use the newer version of the spreadsheet, which I plan to make available by 6 pm EST today.

          Mark

  5. If you are making a payment on signing a contract with a sports person for $40,000, would this $40,000 be recorded as an expense, or would the person who you are contracting be classified as an asset?

    • People aren’t assets, at least not in accounting. However, the prepayment on the contract would be an asset. The cost would be “amortized,” i.e. spread out over the life of the contract.

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