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Business owners should start with understanding a simple definition of what an asset in their business is. Simply put, it is a purchase that has a useful economic benefit of longer than one year. If there is no economic benefit longer than a year, it should be considered an expense. For example, advertising is purchased and then used, and is therefore an expense. However, a computer is purchased and then serves a long term purpose in the business. Outsourced CFO says understanding the difference between asset and expense can help entrepreneurs classify their purchases correctly in their interim financial statements.
The most common types of assets are vehicles, leaseholder improvements, real estate and major equipment. If it is a piece of equipment that is used to help an entrepreneur grow their business or serve a purpose, it should be considered an asset. Such as an x-ray machine in a doctorís office, or an embroidery machine at a clothing manufacturer. Another recommendation from outsourced CFO about assets versus expenses, is business owners should not classify anything less than a thousand dollars as an asset. Even though many purchases could technically be considered an assets, it ends up taking a lot of time to manage entering in all of the small assets, and then managing the depreciation of those assets every single year. If it is under thousand dollars it is often in a entrepreneurs best interest to classify it as an expense so that they do not spend a lot of money managing a large amount of very small assets. An example of this is when an entrepreneur purchases an office printer for three hundred dollars. It is going to serve a useful purpose for longer than a year, but it might not be worth the time to classify and depreciate it on an ongoing basis. They can put it into their expenses and save time.
Something else that outsourced CFO says entrepreneurs should remember is that when they purchase assets, the expense should not show on their income statements. The reason for this is because the asset should entirely bypass the income statement and go directly onto the balance sheet. It will eventually show up on the income statement as it depreciates. The reason it should come out this way, is so that the month that the asset is purchased, it does not significantly and negatively impact the finances of that month.
When entrepreneurs are able to understand how to classify assets and expenses as they relate to their financial statements, they will be able to have more accurate statements in order to make financial decisions in their business with.
A significant problem that entrepreneurs face according to outsourced CFO is that they learn how to read their interim financial statements in order to make important financial decisions. However they have classified their purchases incorrectly and therefore end up with income statements that are unusable. Not only do entrepreneurs need to learn how to read these financial statements, but understanding the difference between asset and expense and how to classify them on their income statements can help entrepreneurs end up with interim financial statements that are useful in making financial decisions.
Something very important that entrepreneurs should keep in mind when making purchases in their business, is understanding the difference between the two. Assets have a useful economic life over a year, whereas expenses either do not have a useful economic life, or there under thousand dollars. It is a good idea for entrepreneurs to proactively setup subaccounts for large assets. The biggest reason for this, is so that an entrepreneur can keep a good record of all of the large assets that they purchase in their business. This is most beneficial according to outsourced CFO when entrepreneurs are most likely to use those assets to resell them on an individual basis for a significant sum of money. An example of this would be vehicles. If an entrepreneur is buying multiple vehicles, the chances are very great that they are going to be able to sell these vehicles later on for significant sum of money such as of fifty thousand dollars truck being sold for ten thousand dollars. So having a good record in subcategories of these assets is very important. However, is owners do not need to be so meticulous on assets that are probably going to have a very little chance of having a resale value, like computers. When entrepreneurs are done with computers, they are usually obsolete, or not going to be able to be used by other people and so their discarded or recycled.
Entrepreneurs should also understand that when they look at their interim financial statements, if they see a small change in an asset account they should understand not only that it is a likely mistake, but what the cause of that mistake is. Since an asset account is saved for assets that are over a thousand dollars, if there is a small change in that account that is any amount under that it is usually a classification error. Somebody probably made a purchase and classified it as an asset instead of an expense. It simply a case of being put into the wrong account. Outsourced CFO recommends that entrepreneurs look for these errors, and move them into the correct account when they find them. An example of this is if an employee buys an office printer for three hundred dollars and classifies it is an assets not an expense.
Something else that entrepreneurs need to keep in mind is what the book value versus a market value of an assets. Outsourced CFO says the book value is different than the market value. The book value is the cost of the asset less the amount it has depreciated since it was purchased. The market value is the amount of money that a business owner could conceivably get for an assets.
