Assets vs Expenses: Differences and Comparisons
As a business owner or self-employed individual, it’s important to understand the differences between assets and expenses. It’s something you’ll need to know if you file your own taxes, which is true for millions of American freelancers and business owners, but it can also help you as an individual seeking to increase your net worth.
In this guide, we’ll show you the differences between assets and expenses and teach you how they need to be filed. We’ll also look at the ways that you can adopt this simple accounting necessity to help with your own personal finances.
What is an Asset?
An asset is something that’s owned by your business and helps it to produce goods or services. Generally, this asset will depreciate over time and needs to be maintained or replaced. An asset can be short-term or long-term and it can be physical or virtual.
For instance, assets for a printing firm would be the machines used to print and the computers and software used to design. For a writing or design agency, it may be laptops or desktop computers. An asset can also be intellectual property, such as a trademark tied to a business name or brand.
What is an Expense?
An expense is a cost tied to the day-to-day running of a business. An expense can include electricity, gas, and water bills, as well any charges levied for the use of subscription services and software.
For a business, an expense could be rent or payroll, as well as petty cash, as it’s used to fund the day-to-day operations.
Assets vs Expenses
Assets and expenses are two separate things and need to be treated as such on a financial statement.
Expenses are recorded on the profit and loss report, along with the income. The expenses are deducted from the income to determine the profit of the business. As an example, if a business earns $100,000 a year but spends $50,000 on expenses (payroll, utility bills, etc.) the business has a profit of $50,000.
Different accounting methods will dictate when an expense is recorded. With accrual accounting, it’s recorded when the expense is charged, but with cash accounting, it’s recorded when the money is actually spent. If you’re billed in July but don’t pay until August, you would register the date as July with accrual accounting and August with cash accounting.
As for assets, these are added to the balance sheet along with equity and liabilities. This sheet outlines the total value of the business and assets are included as they support the business and help it grow. However, assets need to be added via a process known as depreciation. Without it, your assets would only be calculated during the year in which they are added, even though they continue to support the business for many more years.
As an example, let’s return to the scenario of a printing company. If they purchase a large printer for $10,000, that $10,000 will be recorded as an asset for the first year. However, the printer will continue to serve the business for another 5 years or more, before it needs to be updated or replaced.
By adding the asset by depreciation, it will continue to show on the business’s balance sheet for years to come, thus providing an accurate representation of the real worth of the business.
Easiest Way to Record Assets and Expenses
Many small business owners choose to do their own accounting to save a few bucks. However, this can needlessly complicate things and create a massive headache. What’s more, if you don’t have the knowledge, skill or experience, you’re more prone to making costly mistakes and it may cost you more in the long-term.
It’s also best to hire an expert to do your taxes for you. You can hire them to keep track all year long or you can keep all the information yourself and then pay them to bring everything together. In either case, it’s best to get professional help and this becomes more important as your business grows.
There are also tax programs that can help. These programs don’t cost anywhere near as much as an accountant and can keep track of your finances throughout the year. However, they still need some input from you. You will be required to devote some time to learning the layout and the features before it becomes second nature.
Assets vs Expenses for Individuals
Have you ever wondered why successful businesspersons seem to have more control of their personal finances than the average man and woman on the street? It’s not because they make more money or, as people often assume, because they know how to cheat their taxes and get away with it. In most cases, it’s because they have a better understanding of value and are more careful when spending and investing their money.
A business owner tries to avoid needless expenses and instead focuses on assets. A $1,000 expense will reduce a business’s profits, but a $1,000 asset will increase its value. In both cases, they’re spending the same amount of money and arriving at a completely different outcome.
When you spend several years functioning with this business mindset, it begins to influence your personal finances. You think twice about dropping $10,000 on a holiday or a needless expense, and focus more on buying a tangible asset, making an investment or putting the money in a savings account.
This harks back to what we have previously said about good debt and bad debt. The average household spends over $20,000 a year on expenses that could be avoided. If the money is going to be spent anyway, spend it on something that will grow your net worth (an asset) as opposed to something that will harm it (expenses).
That’s how business owners think and if you want to be as successful as the richest founders, it’s a strategy you should seek to adopt as well.