Assets and expenses in a company
Among the elements of the financial statements of a company are assets and expenses. Assets refer to the resources that are owned or controlled by an entity and are expected to provide future economic benefits. Assets are divided into two categories, including current and non-current assets. Currents assets are resources that are exhaustible within a short period of operations and can easily be converted to cash. Current assets include such assets as cash, accounts receivable, stationeries, and prepaid expenses. The second category is the non-current assets, and this category of assets represents long term investments by the company such as machinery and equipment and buildings.
On the other hand, expenses are the costs incurred in generating revenue for a corporation. Expenses represent an outflow of resources from a corporation. Assets and expenses are essentially different from each other. Whereas expenses represent an outflow of cash, assets are the resources owned by a company. Additionally, assets do not represent any cost and do not directly relate to generating revenue. However, expenses represent direct costs incurred while generating revenue for a corporation. Under the matching principle, a generation of a dollar revenue has a direct, consequential impact of a dollar expense incurred. Assets are recorded in the balance sheet, whereas expenses are recorded in the income statement.
Assets and expenses are fundamentally different from liabilities. Whereas assets are resources owned or controlled by an entity and expected to provide future economic benefits, liabilities are future obligations on an entity resulting from past transactions or events. Liabilities represent future sacrifices that an entity has to make. In comparison to expenses, whereas expenses are past sacrifices that an entity made to generate revenue, liabilities are future sacrifices of economic benefits.
In a company’s financial statements, assets are recorded in the statement of financial position or balance sheet. Assets are divided into current and non-current assets depending on the duration of economic benefits provided by the assets. Short term economic benefits are recorded as current assets, and long term economic benefits are recorded as non-current assets. The sum of a company’s assets must be equal to the sum of a company’s liabilities and shareholders’ equity at any given time. On the other hand, expenses are recorded under the income statement. They represent the cost incurred in generating revenue, and thus the residual of revenue or expenses represents a profit or loss to an entity.
Current assets represent resources that provide short term economic benefits to an entity and are easily convertible to cash. Current assets are recorded in the balance sheet and are not subject to depreciation as opposed to fixed assets, which are subjected to depreciation over its useful life. In the balance sheet, the elements of current assets may change annually, whereas the elements of fixed assets may remain for a while, with only their value changing due to deprecation.
The process of generating revenue entails the using up of company resources, which are the assets. The assets used up in generating revenue represents expenses incurred by the company; thus, the statement all assets are eventually expenses.