What is an Asset, and when should you capitalize an Expense ?
What is an Asset?
An asset is anything your business owns that has value and can provide future economic benefits. Assets can be tangible (physical things), like equipment and buildings, or intangible, like patents or trademarks. These items are recorded on your balance sheet and typically provide value to the company over a period of time.
Examples of Assets:
Equipment and machinery
Vehicles used for business
Buildings and real estate
Intellectual property
Office furniture
If you’re a small business owner, understanding the difference between an asset and an expense is crucial for maintaining accurate financial records. Properly categorizing these items can help ensure your financial statements reflect the true value of your business. But when should you capitalize an expense, and when should it be recorded as an asset? Our team at Clear Path Bookkeeping is here to help!
What is an Expense?
An expense, on the other hand, is a cost incurred by your business that is used up quickly, typically within a year. Expenses reduce your company’s income and are recorded on the income statement. Unlike assets, expenses do not provide long-term value.
Examples of Expenses:
Office supplies
Utility bills
Employee salaries
Advertising and marketing costs
Repairs and maintenance
When Should You Capitalize an Expense?
Capitalizing an expense means that instead of recording the full cost as an expense in the current period, you record it as an asset and spread the cost over its useful life through depreciation or amortization. This is typically done when a purchase meets the following criteria:
Long-Term Use: The item will provide value to the business for more than one year.
Significant Cost: The cost of the item exceeds a company’s capitalization threshold (usually greater than $2,500 for most businesses).
Enhances or Extends Asset Life: If an existing asset is improved, upgraded, or extends its useful life, the cost may be capitalized.
Examples of Capitalized Expenses:
Purchasing new equipment or machinery
Renovating or expanding a building
Developing proprietary software
Upgrading IT infrastructure
When Should You Expense an Item?
If the purchase is used up in the short term (usually within a year) or does not meet the criteria for capitalization (listed above), it should be recorded as an expense. Minor repairs, recurring costs, and small purchases typically fall into this category.
Why Does It Matter?
Accurately categorizing assets and expenses ensures your financial reports reflect the true financial position of your business. Misclassifying expenses can distort profitability, mislead investors, and affect tax reporting.
Recording an Asset in QuickBooks Online
All of this information is information is important to consider, but how do you add an asset to QuickBooks or any other bookkeeping software?
Determine if the purchase meets the requirements for being an asset.
Add the asset to your Chart of Accounts. You will need to select an asset Account Type, add the most appropriate category for the detail type, and add a fitting description of the property into the name field.
Determine if you need to add the assets value while setting up the Chart of Accounts. If the purchase of the asset is an uncatagorized transaction in your bank feed, you can leave this value blank during setup. When you categorize the transaction in the bank feed, select the asset account from the drop down list. This will increase the recorded value of your asset on the balance sheet. Alternatively, If this is an asset purchased with a non-business or personal account we will want to include the purchase price into the value field during the Chart of Account setup. This will ensure the correct value appears on your balance sheet while also increasing your owner equity because you made an out of pocket contribution to the business.
Final Thoughts
Understanding when to capitalize an expense and when to record it as an asset is essential for accurate bookkeeping. If you’re unsure about whether an expense should be capitalized, reach out today and I’d be happy to help with a free bookkeeping consultation.
Asset: Anything your business owns that has value and can provide future economic benefits. Assets can be tangible (physical things), like equipment and buildings, or intangible, like patents or trademarks. These items are recorded on your balance sheet and typically provide value to the company over a period of time.
Need help managing your business’s bookkeeping and financials? That’s exactly what our team does at Clear Path Bookkeeping. Even though we are nestled in the front range of Boulder, Colorado we can help your business nationally! Contact us today to ensure you’re on a clear path to clean books!
