For an effective business management, it’s necessary to understand asset vs. expense. So, If you have started up a business or already have one, you know that you have to invest in your business for its progress. Generally, the more you invest, the more successful your business becomes. But the question arises, is this investment really helpful or it will just lead to your loss? For this, you must understand the difference between an asset and an expense, so you can make your monetary plan accordingly and make your business reach the heights of success.
Are assets and expenses the same?
Generally, assets as well as expenses are brought about when you purchase the raw material or any sort of service for your company therefore, one might think that asset and expense are alike. But it is not the truth, assets and expense in actual distinct from each other.
What are Assets?
- Asset is your own property that means it belongs to the business itself.
- Assets are helpful in producing more products for the business.
- The worth of assets usually lessens with the passage of time.
Examples of asset
Trademarks, buildings, land, machineries, furniture etc are a few examples of assets of a business.
What are expenses?
- Expense is the expenditure that is required to run a company.
- It is eliminated from the total revenue of the business in order to clarify the profit earned.
Example of expenses
Examples of expenses include rent, paying employees’, maintenance of the office, marketing etc.
Can we say that expenses and liabilities are same?
No, expenses and liabilities although do seem like the same thing but in fact they are not and cannot be interchanged. As mentioned before, expense is the required expenditure to operate your business. However, liabilities are debts you have agreed upon to pay to other companies or organizations. This means that expenses are a fraction of the liabilities but they are for the benefit and progress of your own company.
What are the differences between asset and expenses?
- Assets are resources helpful in any business. Whereas, expenses are resources utilized to operate a company.
- Assets increase the revenue of the company as they play a major role in increasing the financial profit in the time ahead. While on the contrary, expenses are brought about in past and give no economic benefit in the coming times.
- Assets issue short as well as long term gain. On the other hand, expenses are responsible for only a short term usefulness of the business.
- Asset is usually costly investment but the expenses are mostly inexpensive comparatively.
How can we manage to control asset vs. expense?
Assets and expenses illustrate quite unlike items on a company’s financial statement. Therefore, the how you control and oversee them must also be dissimilar.
Managing asset vs. expense
Assets are displayed by the side of liabilities and equity in a balance sheet. This sheet displays the extent of profit you are gaining from your business in a particular span (retained earnings).
As the time passes by, assets increase and enlarge the worth of business. It is to be considered that the increased worth of the business must be precisely measured in contrast with the foundational value of asset. It is equally essential that your account displays the decrease in worth of assets as well (depreciation). To make this possible, assets are overseen by catching up on the method called depreciation. It is useful to display the value of asset in its entire useful life and informs if there is decrease in worth of asset over the session.
For instance, you own a beverages company. You spend particular cash on buying the appliances required for making the beverages. These appliances are increasing your businesses worth as it is allowing you to make beverages. But they will work for a period of time until a time comes when they become old-fashioned or are too old that they no longer work anymore. Then, you have to replace them with a new one. We can observe that these appliances had been of service and fruitful throughout this period of time but we will see that these appliances were more effective when they were new and slightly decreased in their effectiveness with the passage of time, until the time came when they no longer worked.
Let’s consider that you bought these appliances for 3600 dollars. This expense would be catalogued only in the year these appliances were purchased. Your financial statement does not show the worth these appliances increased all along the rest of the time. Through devaluing the asset in this way all along its service time, you are setting up the worth of the asset with respect to the extent of worth it increases in your business. This shows a much precise image of the ultimate value of your business.
Expenses are to put on the side of debit in the report of the revenue. As the double-entry bookkeeping law states that if you are listing your expenses as a debit, you have to create a list of credit in an additional account which is offset of an asset or liability account.
The calculating technique you have used explains the interval in which your expense is displayed. For instance, you are using the accrual accounting method now, the span in which the expense was brought about you have to display the expense in the same time. On the other hand, you are following the cash accounting method then, you have to catalogue the expense at the time when the cash was given away.
For better understanding let’s consider that in the last days of January, you have been given an accounting statement for the rent of the offices. As you do not clear your expense until February comes, according to the law of the accrual accounting, the expense had been catalogued in January when the expense was actually brought about. On the other hand, according to the Law of cash accounting, the expense is catalogued in February when the rent was actually paid off.