Accountants must be aware of the difference between assets and expenses because of the effect confusing the two can have on a company's financial statements. An accountant who attempts to treat an asset as an expense will understate the company's profitability and total net assets, since assets are not supposed to be wholly expensed in the period they are purchased. Failing to treat assets and expenses correctly will result in erroneous financial statements.
What is an Asset?
An asset is an item that a company owns. Assets are divided into three basic groups: capital assets, current assets and intangible assets. Capital assets are typically owned for the long term and include buildings, land, vehicles and manufacturing equipment. Current assets are items that can quickly be converted to cash, such as actual cash, accounts receivable, inventory and investments such as bonds and stocks. Intangible assets are items that cannot be physically touched, including goodwill, patents and trademarks.
What is an Expense?
Expenses are costs related to running the business. Expenses are deducted from revenue to determine the profitability of a company. Typically, the largest expense for a company is cost of goods sold -- raw materials, direct labor and other costs related to manufacturing or purchasing an item for resale. Depreciation of property, plant and equipment should also be captured in the cost of goods sold. Administrative expenses cover all expenses related to running the company. These expenses include selling and general administrative expenses, including indirect labor, taxes and other miscellaneous operating costs.
Accounting Treatment of Assets
Assets are located on the balance sheet and are equal to liabilities and owner's equity. Items classified as assets are increased with a debit entry to the general ledger. The accounting concept of depreciation decreases the value of an asset over time. Depreciation refers to decreasing the value of an asset over a specified period of time and incurring the depreciation cost on a regular basis, usually monthly or annually. A credit entry is made against the asset when the depreciation charge is incurred.
Accounting Treatment of Expenses
Expenses are located on the income statement. They are recorded by way of a debit entry to the general ledger and a credit to either cash or accounts payable. Expenses related to producing finished goods or acquiring goods for resale should be recorded to a cost of goods sold general ledger account. However, general operating costs should be directed to the appropriate administrative general ledger account.