Ouch, does that title on this post sound too nerdy and detail-oriented for demystifying anything? Sorry, but so many people get hung up on this. And it matters to your financial projections, so I say take a couple minutes, deal with it, and get on with your planning.
Assets are supposed to be physical, resellable, things of value that your company owns as part of the normal course of doing business. Expenses are supposed to be regular spending on goods and services that are used by the business to do it’s work.
Where it becomes an issue is when people want to pretend that what they’re spending as expenses are really building assets. For example, when you pay a programmer, that should be an expense, not an asset. You’d like to think that programmer is making something (like paying a bricklayer to make a wall) because it will make the books on your business look better.
After all, net worth, one of the theoretical (very theoretical, by the way) measures of business value, is assets less liabilities. So the more assets, the better.
But there’s an important catch. What you pay the programmer should be an expense, not an asset, because expenses are deducted from taxable income so they lower your tax bill. Which means you have more money. If you call the programming an asset (also called capitalizing the spending), you have less money. And — who are we kidding? — what you get from the programmer is what you get, regardless of whether you call it an asset or an expense.
The government has a lot to say about this too. The IRS has a stake in what you call expense and what you call assets. The IRS allows us to call a lot of office equipment expenses, but it won’t let us call the legal expenses associated with intellectual property or raising new capital expenses; we have to call those assets. Strange, I know, but still important.