assets, etc. more newbie questions

Carol Champagne carol@gnumatic.com
Fri, 30 Mar 2001 13:33:55 -0600


Brian Craft wrote:

> Ok, some more simple questions:
> 
> Seems like "assets" are things you hold long-term, while expenses are things
> you consume. So (from the perspective of your bank account) a book would be a
> transfer to an asset, and toothpaste would be a transfer to an expense account.
> 
> Is that right?
Will try to answer your questions as a non-accountant....

According to one of my books, accountants use the "materiality" rule and 
the time frame to determine whether something is an asset or an expense. 
  If the financial impact is so small that it won't have a material 
impact on a company's financial picture, the object is treated as an 
expense.  If the object benefits the company in the current accounting 
period (ex. current year) only, then it's an expense.  If the object is 
a resource that will benefit the company in current and future 
accounting periods, then it is an asset.

One main reason accountants make this distinction is that businesses 
have an incentive to call everything an expense, because that reduces 
their current taxes.  So certain objects are required to be treated as 
assets by a business---things like buildings, vehicles, and equipment, I 
think.  The business is allowed to expense only part of the value of 
these objects each year---that's called depreciation expense.  So using 
this rule, your house, car, furniture and any home equipment you have 
would be assets.

One way to look at it: is the object something that you would insure? If 
you're filling out a home inventory for your insurance agent, is the 
object something that would be material enough to write down?  So in 
that case, toothpaste probably isn't, and a book may or may not be 
(depending on how expensive/valuable the book is.)

Another way to look at it: do you consider the object a long-term 
investment or a normal cost of living?  If it's an investment, something 
that will benefit you for a while, call it an asset.  If it's a normal 
cost of living purchase, it's an expense.

It might be easier to just have one account for home inventory assets 
rather than have a separate account for TV, stereo, furniture, etc.  It 
all depends on how closely you want to track these items.

> How about nails? Or other things that go into your house? Seems like could put
> them in a "house" asset, or you could call them an expense since you basically
> consume them. How about a water heater?
> 
Nails are something you consume in the current period, so I'd call them 
an expense.  A water heater is something that will last a while and is 
probably expensive---might be something you'd write down on a home 
inventory, so you might choose to call it an asset.  But if you think of
it as a normal repair or maintenance item, you might call it an expense.

> How about clothes? I guess there's some arbitrary judgement call having to do
> with how long you expect something to last. 
>
That's a judgment call.  I'd call them an expense, because I don't 
consider them an investment.  They're more a normal cost of living.

 
> Does this have something to do with the time scale on which you are accounting?
> So if you're accounting on a timescale of years a water heater would be an
> asset, but if you're accounting on the timescale of decades a water heater
> would be an expense?
> 

Accountants use the "current accounting period" as a time scale, and I 
think that's generally a year.  So based on that definition, a water 
heater would be an asset.  But again, it also depends on how material/
significant you consider it--whether it's an investment or normal 
maintenance.

> All these are small for me, and so not a big deal how I account for them.
> But here's a big one:
> 
> Fabric. Seems like an expense, because you consume it. But what if you're a
> quilter (by hobby), and have thousands of dollars of it? Seems like a raw
> material worth thousands of dollars would be an asset. You do consume it, but
> at roughly the same rate that you replenish it. Is the consumption rate an
> "expense" and the fabric stash an "asset"? How do you keep track of this?
> 
I'm not sure on this one. In a business, raw materials are classified as 
inventory, which is an asset.  As those raw materials get processed and 
move into finished goods, you transfer the raw material cost into the 
finished goods inventory account (asset).  When you sell the finished 
goods, you transfer the total cost of materials, labor, etc. used to 
produce those goods into a cost of goods sold account (expense)   So I 
guess if you want to track this as a business, you would call the fabric 
a raw materials inventory asset.  As you make the quilts, you'd transfer 
the raw materials cost from the raw mat. asset account to the finished 
quilt asset account.

  When you sell the quilt for cash, you would transfer money from 
(credit) a quilt income account to (debit) a cash account.  You would 
also transfer money from (credit) the finished quilt asset account to 
(debit) the cost of goods sold expense account.  Just a guess based on a 
business example I see....

> On the other side, Dave says a liability is money you owe but haven't paid.  So
> a credit card balance is a liability. Does it become an expense when you pay
> it? Seems like the credit card balance would consist of transfers to expense
> and asset accounts. Paying it off would be a transfer from a bank account. So
> in some sense it does become an expense (or asset), but you'd never have a
> "credit card" expense account (except for the "credit card interest" expense).
No, it doesn't become an expense when you pay it off.  The expense 
occurs when you charge something on the card. When you buy something on 
credit, you transfer money from the credit card account to the expense 
account.    The expense is the object you are buying on credit.  If I 
buy clothes with a credit card, for example, the expense is the clothes 
My method of paying for them is with credit, a type of liability 
(instead of cash, check, etc.).

At some point, I have to pay off that credit card loan by transferring 
money from my bank account to the credit card account.  This transaction 
reduces the bank account and reduces the credit card acount by the same 
amount.  Any interest I pay on the balance is an expense.

GnuCash offers a credit card type account, which is basically a 
liability account with different headings (Charge, Payment).  I would 
use that for credit card transactions---that way you can reconcile the 
account to your monthly statements.

Hope that helps...
Carol Champagne

> 
> b.c.
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