How are assets and expenses related in business

If you start a business and you’ve not got much experience in accounting, you might find the different financial terms a little confusing. It’s important to understand them, though, as they are often a crucial part of your business. For instance, it’s a good idea to learn what assets and expenses are and how they’re related to each other.

This article will define both of those terms and try to explain how they’re related. We’ll look at a few topics, including:

• What are assets?
• What are expenses?
• How are assets and expenses related?
• How a simplr app can help track business expenses

Assets are things that your business owns or leases that are necessary for the company to continue running. There are several different types of assets: 

• Current assets
• Fixed assets
• Tangible assets
• Intangible assets
• Operating assets
• Non-operating assets

The term usually applies to physical resources (known as tangible assets) but can also refer to copyrights and your brand name. These are known as intangible assets — they aren’t physical objects but are still valuable to your business.

Another important part of the definition of assets is that they need to have monetary value. The money your business owns is an asset in itself. Current assets are things that you exchange for cash on a day-to-day basis, like your product inventory or any debts customers owe you (known as your accounts receivable).

Fixed assets are the opposite of current assets. If it’s likely that you’ll keep the item in question within your business for a year or more, it’s a fixed asset. This means everything from company vehicles to property to office equipment are fixed assets, either because you’re unlikely to sell them anytime soon or because it’s difficult to sell them quickly. 

You can also categorise your assets by how often you use them instead of by their shelf-life. For example, operating assets are things you use nearly every day and have value to your business. This means that tools, equipment, cash, and vehicles are all operating assets. 

Non-operating assets aren’t essential to the running of your business but still have value. Things like unused property or investments made using company money are examples of this kind of asset.

Business expenses are costs paid to keep the company running. Any time you purchase an item for your business, that’s an expense. Companies need to track their expenses because it factors into how much tax they need to pay. You can hugely reduce your tax bill by claiming back your various purchases as business expenses. 

Like assets, you can organise your expenses into several different categories. These include:

• Fixed expenses
• Variable expenses
• Periodic expenses
• Tax-deductible expenses
• Non-tax-deductible expenses

Tax-deductible and non-tax-deductible expenses are fairly self-explanatory: you can claim the former back from your tax bill, but you can’t do that with the latter. Luckily, most business expenses are tax-deductible. It’s mostly your personal expenses like grocery shopping and personal purchases that are non-tax-deductible.

Fixed expenses are costs that you pay consistently and don’t change much over time. Your rent or mortgage payments are fixed expenses, as are bills like your wifi or phone payments.

Variable expenses are things you pay consistently, but the cost changes each month. Since any purchases related to your product inventory will vary depending on your sales, this is a variable expense. Utility bills are also a variable expense since you’ll use different amounts of gas, water and electricity each month. 

Periodic expenses are any expense you don’t pay consistently. If you need to pay an unexpected, one-off bill or fine, that’s a periodic expense. 

Like budgets and forecasts, it’s easy to think assets and expenses are essentially the same things. After all, if you spend money on something, it’s an expense. If something costs money and your business owns it, it’s an asset. This means there should be a big overlap between expenses and assets.

While this is partly true, it’s vital to categorise them separately when doing any accounting for your business. You have to list expenses on your income statement, which is where you’ll record your company’s profits and losses over a set period. Assets, on the other hand, will go on your company’s balance sheet.

Another part of the relationship between assets and expenses is the length of time you own an item. If you run a sewing business and buy a sewing machine, that’s an expense for the financial documents for that month. It’s an asset for much longer, though. 

Since the sewing machine will be an asset for much longer than a year, you’ll need to track how much its value depreciates over time. Depreciation refers to how an item’s value decreases over time. So you might buy the sewing machine for £1,000 (and list it in your income statement as an expense for £1,000), but it will only be in your balance sheet as a £1,000 asset for the first year or so. 

Each time you create or adjust your balance sheet, you need to revalue your assets, and the sewing machine will be worth slightly less each year. This is because as it breaks down and becomes slower, it will be less valuable to the running of your business.

A big part of running your business will be keeping track of how much you spend and what you spend it on. Although it sounds simple, it can be a tricky job if your financial data isn’t all in one place. A good way to ensure you have all the information you need to manage your finances is to use the Countingup app. 

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 
Find out more here.