For any business owner, their primary objective should be to maximize profits and minimize waste while maintaining the efficiency and integrity of the business’s operations. To do so, they must understand capital assets and expenses and how to manage them effectively.
It costs resources to run a business in the long run. Capital expenses refer to all of these resources a business consumes to maintain its operations. They do not provide a value beyond the accounting period in which they are incurred.
- Purchasing a new printer with ink and toner
- Paying rent and utilities for workspace
- Depreciation of a fixed asset (i.e., wear and tear of equipment)
- Repairing a fixed asset (i.e., roof replacement, new drywall)
While capital expenses relate to the upkeep of a business, capital assets are the resources used to make money and attract customers. This includes cash, property, prepaid expenses, intellectual capital, and customer receivables. While these assets cannot be sold directly to customers, they are the vehicles to make a profit.
- Cash – Businesses can buy other assets and pay for business expenses with cash
- Warehouse – The space in which workers will create products to be sold to consumers.
- Computers – Workers will use software and technology to track important information related to the business and generate reports.
Expenses and assets together
Expenses are resources that have already been consumed in the operations of a business. In contrast, assets are resources that provide some form of economic benefit in the future. While they have their distinct purposes, they do interact within the accounting framework.
One example of this is that cash, an asset, is used to pay for most business expenses. Additionally, fixed assets lose value over time and are treated as a depreciation expense.
Accounting for assets
Assets are reported for a specific date on a business’s balance sheet. They will stay on the balance sheet until it is consumed in some way which can include:
- Depreciation causes value loss
- Payment of expenses (i.e., employee wages)
- Exchange for another asset (i.e., paying cash to purchase equipment)
- Payment of liabilities
Accounting for expenses
Expenses do not provide benefit in future accounting periods and are reported for the entire accounting period on the income statement. This can include:
- A fixed asset depreciates and is expensed in the accounting periods of the asset’s useful life.
- Expenses for administrative costs are accounted for in the period in which the expenses are acquired.
In some cases, it will be necessary to account for expenses as assets on the balance sheets until the economic benefit of the expense comes to fruition in future accounting periods. Examples of this include:
- Prepaid expenses
- Unsold inventory that incurs expenses
- Costs of a self-constructed asset
The bottom line: Expenses are resources consumed while running a business, while assets are resources available to produce income. Understanding these two elements is a fundamental part of running a successful and profitable business.