Throughout your business life, you will have to manage assets vs expenses. In the game of accounting, small business owners and others are often puzzled by which one provides us with economic benefits. Today we unleash on a path with you to discover the difference between assets and expenses that will make your life easier. Join us!
For a better understanding of your business’s financial health, we need to demystify these two terms.
Assets put money in your pocket. We consider assets to be:
- Your business’ resources that have worth after a year or some period
- Reported in your financial statements, which consist of the balance sheet, income statement, and cash flow statement
- Subjected to depreciation over its useful life
- Resources that can bring you future economic benefit or profitability, as well an increasing value
Expenses don’t produce cash flow.
We define expenses as:
- The daily, short-term costs you are expensing in your business
- The cost of operations to be able to generate revenue
- Resources that are spent due to short life span and can’t increase in value
- A type of expenditure that flows through income statement to arrive at net income and is being recorded in bookkeeping in two accounting methods
To fully understand these terms, we will provide you with some examples.
An asset can be tangible: a car, real estate, cash, machinery. Or an intangible asset like intellectual property, patents, trademark, copyrights, or goodwill. You can also acquire and upgrade any fixed asset (ex. property, technology, equipment) by capital expenditure.
Meanwhile, some of the business expenses are office supplies, salaries, depreciation and amortization, marketing, etc. Furthermore, your business can write off tax-deductible expenses on their income tax returns for tax purposes by respecting IRS (Internal Revenue Service) guidelines.
The purchase price of an item separates assets from expenses. The cost of an asset is usually above the $2,500 purchase price, while the cost of an expense is less of the same amount.
We can state that assets and expenses are not yin&yang. Even though they cannot exist without the other, one brings you profit and one does not. Nonetheless, they complement each other to improve your business. But assets are where your focus should point.
We can conclude that assets and expenses are not isolated but actually cohabit within the accounting standards. The key difference lies in focus.
Simply put, assets are things you acquire to produce cash flow. To be successful, you should focus on the future and learn from the past, meaning that you know and analyze your previous activities by managing expenses. But by managing assets, you update and improve, which is far more critical. All successful people understand what assets are. And they use them well.
Managing assets and expenses in the bookkeeping world are significant since they vary in their financial statements. Here is how we do it. Continue reading our guides below.
An asset needs to be recognized in the balance sheet by meeting recognition criteria. The general criteria are probability and reliability. When it’s highly probable that the future economic benefits will flow into a business or have a reliably measured cost or value, an asset can be submitted into the balance sheet.
We account for assets by doing a process of depreciation, which shows the asset’s cost throughout its useful life and shows it’s losing value over time due to that process of devaluation.
The same accounting standards apply to expenses. Starting from probability: a decrease in future economic benefits due to the decline in an asset or an increase in liability that can be reliably measured has been noticed, making an expense recognized. It means that expense recognition simultaneously occurs with the decrease in assets.
We record expenses on the debit side of the income statement, where we measure losses and revenue of a business.
Depending on which accounting method (accrual or cash method) you use, expenses need to be recorded in the profit and loss report (or previously said income statement) in a specific accounting period.
Don’t forget to keep an eye on that income statement since it’s one of the essential documents to track the financial health of your business. So during the next tax year, from January 1st till December 31st, remember to analyze it regularly. It will help you upgrade.
If you want to learn even more about accounting for assets and expenses, you can check these video guides we prepared.
Yes, you probably guessed — it’s assets! Wealth can be accumulated by managing assets.
The critical difference between expenses or assets making you wealthier is the impact on your net worth. In other words, the total amount of what you own minus what you owe is the game-changer. Even the English language provides you with similarly written words (own, owe) to determine the importance of focusing on the right thing and where that will lead you.
The trick is to invest in assets when you have a choice and to limit your expenses. Here are some other tips:
It means that the good assets will keep you waiting a bit. Easy money quickly goes away.
For example, if you buy a seemingly not good property in an attractive area, eventually someone will want to start building and your parcel will increase in value. If you negotiate well, the cost of goods sold is minimal in that case.
When you start a business, you need to prioritize. And that goes for yourself as well. Plan your expenses accordingly. Find substitutes for every cost if possible. Maybe you don’t need a new Armani suit this month, so replace it with second-hand shopping out.
Many people fall into this trap of having multiple credit cards and being stuck in paying them off. Use credit cards to purchase business assets. But if you are already riddled with mismanagement of credit cards in your business or personal use, just remember to pay them off regularly every month.
In our experience of managing finances and understanding how to capitalize on assets, we highlighted the four most essential assets that can help you win and become rich.
- Start building a business or invest in some.
- We live in a time when you have maximum protection and low overhead due to digital marketing and the benefit of more tax write-offs while creating a business. Tax write-offs help you reduce your real-life income and put you in a better financial position. As long as you can invest in or start a company that is a cash-flowing asset to you, absolutely do it! Start implementing your ideas in the form of business.
- Managing loans.
- Put yourself in a position to catalyze your own source of financing by becoming your own bank. What do the banks do? Lend money. Utilize loans and become your own banker. By providing loans to other people or ourselves, you can benefit from the cash flow that comes with charging interest.
- If you would like to start becoming your banker, we suggest this article for diving into the topic. Also, Wealth Nation prepared a learning program for you to become your own banker in just eight weeks.
- Remember — fear leads to nowhere, education leads to success. Don’t be afraid of managing loans. Loans are assets.
- Real estate.
- Within real estate, you can take advantage of taxes, get your cash flowing and replace the bank. Give yourself time to do your research and learn about real estate because you will need to understand how the real estate environment works.
- Life insurances.
- Paying your life insurances in dividends can transfer wealth into your life. You accumulate cash and invest further. Life insurances allow you to produce cash flow while you are still alive and use it in loans. You can utilize those loans to capitalize on other investment opportunities. There is an eight-week course to learn about this at Wealth Nation. We can guide you through if you face any difficulties. Believe us. We’ve been there.
You have probably had difficulties with banking and accounting. Hopefully, our article helped you to understand better how finances work. Let’s absorb the main learning points.
- Focus on assets, but don’t neglect your expenses. Be patient, proactive in learning and intelligent in choosing the right assets. Keep track of your payments regularly.
- Account both assets and expenses properly. Use the knowledge. Connect with the finance community and learn. There is always someone who did it. There is always someone who wants to share their knowledge. Try different accounting methods and you will find the most convenient one for you.
- Capitalize on the main four assets. Be self-confident and capitalize on the four assets we told you about. During the process, let us know how your experience is going. Get in touch with our Wealth Nation community.
To conclude, we hope you found this article helpful and that you expanded your knowledge about assets and expenses. To learn more about managing assets and how you can become wealthy using infinite banking, enroll in our Wealth Nation membership community. You can reach us here. Good luck!