It is important for you as a business owner to understand the accounting elements. Fondly referred to as ALICE amongst accounting professionals, ALICE means Assets, Liabilities, Income, Capital (Equity), and Expenses.
Particularly, you must be able to tell the difference between Assets and Expenses as you will be dealing with them frequently while running your business.
But what if you are a student and not the owner of a business?
Don’t fret, this post is equally tailored to help you understand the difference between assets and expenses. Armed with this knowledge, you will find it easier to allocate any business transaction to the appropriate account.
What Are Assets?
Assets are defined by the International Accounting Standards Body’s [IASB] “Framework” as a resource under the control of an entity resulting from events that happened in the past, and from which future economic benefits are expected to flow to the entity.
For an asset to be recognised in the statement of financial position, the asset must meet this definition. Examples of Assets are Motor Vehicles, Cash, Inventory, Patent, Copyright etcetera. Motor vehicles are assets that help businesses transport goods and people as the case may require.
What Are Expenses?
Expenses on the other hand are outflows from your business. Expenses are resources consumed in the day to day running of your business.
For context, your business must incur expenses to earn revenue and you also have to incur expenses, although capital in nature, in order to own assets. Examples of expenses are depreciation, utility bills, salaries and wages, rent etcetera.
Now let’s go on and establish the differences between Assets and Expenses.
The Differences Between Assets And Expenses
- Assets are either current, intangible or non-current, this means the life of an asset could either span over less or more than one year. Expenses on the other hand are used within a relatively short period of time. In all cases, expenses are for 12 months or less. Examples of current assets are cash, inventory, that of non-current assets are trucks, buildings while those of expenses are rents, utilities and so on.
- Assets bring about future economic benefits to businesses through their ownership. Expenses, on the other hand, do not lead to any future economic benefit.
- Expenses are items of the income statements while Assets are recorded in the statement of financial position, formerly called the balance sheet.
- Some expenses are notional in nature, in the sense that such expenses do not result in the outflow of cash examples are depreciation of assets. On the other hand, there is no such thing as a notional asset.
- Expenses are reported for the whole accounting period, usually 12 months. Assets are recorded on a specific date on the balance sheet.
These are top differences you need to know as a business
owner, Now we’ll look at the relationship between assets and expenses.
The Relationship Between Assets And Expenses
- Expenses may arise as losses when the Assets of a business are sold for less than their net book value.
- There are instances where expenses can be assets, for instance, a prepaid electricity bill is a current asset to your business.
- Assets like Cars, Furnitures are expensed over their estimated useful life in the form of depreciation expenses.
- Assets like inventory are expensed as the cost of goods in the income statement whenever they are sold.
Treatment Of Both Assets And Expenses In The Financial Statements
Expenses are deducted from revenue to bring about the total profit realized by a business in any accounting period.
Abiding by the double-entry principle, each time a debit entry is made for expenses, a corresponding credit entry must be made for the relevant asset or liabilities account.
Expenses should be treated with the accrual (matching) concept in the income statement. This means expenses should be recorded when they are due and not when paid (cash basis). For instance, if your business purchases 100 units of pencils for N20,000 and you sell 80 units for N24,000 at the end of a period. The cost of goods sold (expenses) that will be recognized in accordance with the accrual concept will be based on the 80 units sold i.e. 80/100 x N20,000 = N16,000. The N4000 worth of pencils would be rolled over until when you eventually sell them off.
Assets are items on the balance sheet and are recorded at cost. The cost of these assets should be depreciated over the estimated useful life in the case of non-current while the current assets and intangibles are valued at the end of each period.
You must follow the historical cost concept to properly record the cost of assets. This concept ensures objectivity and fairness as it is the amount of cash or the fair value of the considerations given to acquire assets that are recognized on the statement of financial position.
Before you go:
You can check this Micheal Allison video explanation of the difference between assets and expenses.