Difference Between Assets and Expenses
In accounting, the term assets and expenses are easily confused as both financial classifications raise from the company purchase. Company purchases goods that can be classified as assets or expenses.
It is very important to differentiate between assets and expenses because it has a huge impact on the both balance sheet and income statement. The treatment of both accounts has a significant influence on company performance as well as net profit. If we wrongly classified assets as expenses, the company’s profit will be decreased. On the other hand, profit will be overstated if a large majority of expenses are capitalized as assets. So it is very important to differentiate between assets and expenses.
Assets
Assets are the resources that have future economic value and they are belong and under the control of the company. They are expected to provide future economic benefits to the company. Assets are presented on the balance sheet which can be current assets and noncurrent assets.
Some assets are not staying on the balance sheet forever, they will be reclassed to expense at any point in time. Fixed Assets will be depreciated to expense as the assets lose their value over time. So they are classified as assets as their benefit are not yet consumed. When their value is consumed, some parts of assets are also reclassed expenses as well. We cannot recognize assets without future economic benefits.
Example of Assets
These are the example of assets:
- Cash: company can use them to purchase and settle in the future.
- Prepayment: prepayment over rental, insurance, and payroll will be reclassed to expense in the future when they are utilized.
- Inventory: The items that company has not yet sold, and will be reclassed to the cost of goods sold when they are sold to customers.
- Office Supplies: The consumable equipment which is not yet used.
- Fixed Asset: The long-term assets that are under company control and use to support operations and generate revenue. They usually have a useful life and their balance will be reclassed to depreciation expenses based on useful life or activities usage.
- Investment Property: The long-term assets that the company uses to lease to other parties for revenue.
- Intangible Assets: The assets without physical substance can provide benefits to the company.
Expense
Expenses are the cost that company spends to support operations and generate revenue. Company spends to get the work done. Expenses will be deducted from total revenue to get the net profit. They are part of the income statement which shows on the opposite side of revenue.
Expenses will provide benefits to the entity during the same accounting period. If the expenses are incurred, they will provide benefits to company in the same period. They will not carry any benefit to the future. For example, when we pay the employee this year, they will work for us only this year. If we pay them in advance, it will be classified as prepayment which is the asset. We only recognized expenses when consuming the economic benefit. The expense and its benefit must be matched and recorded in the same accounting period.
Example of Expenses
- Payroll Expense: The expense that company pays to an employee in exchange for their services.
- Rental Expense: The rental company uses it in the current accounting period.
- Depreciation Expenses: The expense raised due to the consumption of fixed assets.
- Utility Expenses: The expenses that company pays on water and electricity.
Difference Between Assets and Expenses
| Assets | Expense |
|---|---|
| Assets are the resource that companies expect to use in the future. | Expenses are the resource that a company already consume during the accounting period. |
| Assets are recorded on the balance sheet as of the reporting date. | Expenses are recorded on the income statement over an accounting period. |
| They store a value that can provide future benefits to the business. | They cannot store any future benefits for the company. |
| It stores the value for the company for more than 12 months. The current assets have a less useful life.
However, the assets will be classified as an expense by the time it is consumed. |
The value will be consumed within the current period. |
| For example, current assets: cash, inventory, and accounts receivable. Noncurrent assets: fixed assets, investments, intangible assets | For example, Cost of goods sold, operating expense, finance cost, and depreciation expense. |
Impact of Taxes on Assets Vs Expenses
Assets are the account that shows on the balance sheet, it does not have any impact on the profit, so there is no impact on the income tax expense as well. However, some companies manipulate the financial statement by not capitalizing the asset but recording them as expenses instead.
Expenses are the accounts that deduct the income to arrive at the net profit. It will have a direct impact on the income tax expense. The higher expenses will reduce the profit before tax as well as the income tax expense. The company, that wants to reduce income tax expenses, will try to increase the expense. Some companies even try to increase expenses by reducing the capitalization of the asset.
Relationship between assets and expense
The assets and expenses are completely different. However, they have a close relationship with each other. Some assets will be reversed to expense when the time comes.
- Fixed assets will be reclassed to depreciation expense based on the useful life.
- The inventory is the current assets and it will reclass to the cost of goods sold based on when they are sold to the customers.
- The supplier advance is the current assets and it will be reclassed to expense when the transaction is complete.
- Intangible assets are also required to amortize expenses based on their life.