Assets vs. Expenses

People often confuse assets with expenses.  This is because both assets and expenses use up your funds – these are things you can spend money on.

Assets provide a future benefit to your business.  They help bring in future revenues and profits.  Assets appear on the balance sheet.

For example, inventory is an asset.

Expenses are the cost of bringing in revenues.  They were needed to bring in the revenues and profits that you reported this year.  Expenses appear on the income statement.

For example, just as inventory is an asset, “cost of goods sold” is an expense.  This is the cost of inventory that was sold during the year.

The difference is really one of timing.  An asset is expected to bring in a benefit sometime in the future.  When the benefit comes in, then the asset becomes an expense.

As it is sold, inventory is moved out of the inventory account on the balance sheet, and into the cost of goods sold account on the balance sheet.

Sometimes, an asset can lose value without ever providing a benefit.  This would be considered a loss, which is, like an expense, deducted in the income statement.

Suppose inventory is somehow damaged or rendered obsolete.  Then it would be recorded as a loss on the income statement.

Please note that definitions of assets and expenses for financial accounting often differ from their definitions for taxation purposes.  A legitimate expense on your income statement might not be deductible on your tax return.