Assets and expenses are two important accounting concepts elemental to understanding your company’s performance. While both assets and expenses have a debit balance on your business’s financial statements, that’s all they have in common. Learn the difference between assets vs. expenses and why one holds more value for your business than the other.
What is an asset?
An asset is anything of value that your company owns. Assets can be tangible, like a delivery van or a laptop, or intangible, like stocks or trademarks. Assets benefit your company by generating income, increasing in value, or being used to create other value. To be considered an asset, the item must maintain its worth for at least one year after acquisition. However, not all assets grow in value; some assets, like a car you use for business, wear out and depreciate over time.
[Read more: What Is Asset Amortization?]
What is depreciation?
Depreciation is the decrease in an asset’s value over time. This decrease can be due to wear and tear, obsolescence, or other factors. In accounting, depreciation is used to spread the cost of an asset over its useful life.
There are four different methods for accounting for depreciation. Choosing the right method for your business depends on your accounting needs, the type of asset, your industry, and the size of your company.
Depreciation only applies to assets, not expenses. This is one of the key differences between the two accounting terms, but first, let’s review what an expense is.
What is an expense?
An expense is a payment made for a service or product. Expenses are typically categorized as costs that contribute to the overall operation of a company — meaning that after a year, there’s nothing to show for it since the item is completely used. Expenses include things like food, utilities, office supplies, or rent.
[Read more: How to Write an Employee Expense Policy]
What's the difference between an asset and an expense?
Assets and expenses are two fundamental concepts in accounting and finance, but they represent opposite sides of the financial equation.
Assets are resources that have economic value and are expected to provide future benefits to a business or individual. Expenses are costs incurred to generate revenue or maintain a business operation. They are typically classified as costs of goods sold, operating expenses, or other expenses.
After you debit the cost of the asset to the fixed asset account, you must balance it by crediting the same amount to the business' cash account.
Indeed
Another key difference is that expenses are usually purchases less than $2,500. That’s a good heuristic for determining how to account for an item as either an expense or an asset, but consult with a financial advisor if you’re unsure.
How are assets and expenses tracked in accounting systems?
Remember, accounting is based on the double-entry system, which requires that every transaction be recorded as a debit and a credit. This ensures that the accounting equation (assets = liabilities + equity) remains balanced.
Assets are tracked on the balance sheet to a dedicated account. For instance, if your restaurant purchases an oven for $2,500, you can debit that amount to the fixed asset account. “After you debit the cost of the asset to the fixed asset account, you must balance it by crediting the same amount to the business' cash account,” explained Indeed. “This is because the worth of the asset is now something that the business owns.”
[Read more: 6 App-based Employee Expense Tools for Small Businesses]
Track the item’s depreciation depending on the methodology you choose and how long you believe you’ll be able to use the item. Continuing the oven example, you may plan to use it for five years before purchasing a new one. Using straight-line depreciation, you would debit $625 per year to the depreciation expense and accumulated depreciation.
Expenses are tracked differently depending on whether you use the accrual or cash basis of accounting. Accrual accounting recognizes expenses when they are incurred, regardless of when cash is received or paid. Cash basis accounting records revenues and expenses only when cash is received or paid.
Regardless, record your expenses on your profit and loss report as a debit to your cash account. For example, if the restaurant spends $1,000 on ingredients like vegetables, meat, eggs, and butter, record that amount (depreciation does not apply). Track the expense as a credit to the company’s liability account to follow double-entry accounting.
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