Assets vs. Expenses: Learning the Difference Can Make You Rich

The big difference between assets vs. expenses lies in accounting

The most significant difference between assets and expenses shows up in accounting. The two have different purposes, so they impact your financial statements differently. This distinction is crucial for proper tax reporting.

• Assets represent long-term value, so accounting for their cost over time (through depreciation) provides a more accurate portrayal of your business's worth on the balance sheet. 
• On the other hand, expenses are immediate costs of doing business and directly reduce profit. 

From a tax perspective, assets offer depreciation deductions spread over years, while expenses typically provide immediate write-offs.

How to tell an asset from an expense 

Distinguishing between an asset and an expense is crucial for accurate bookkeeping and financial planning. While the capitalization threshold offers a general guideline, consider each purchase carefully to clarify its classification.

Questions to help determine what type of cost you're incurring: 

• Will it provide value for more than one year? 
• Is its cost above your business's capitalization threshold (e.g., $2,500)?
• Is it primarily used to generate future revenue or improve long-term efficiency?

If you answered yes to any of the above questions, you should track that item as an asset rather than an expense. 

7 actionable wealth-building tips for small business owners

In the most basic terms, to build wealth as a business, you should prioritize spending on assets when you have a choice and minimize expenses when you can. 

Here are seven wealth-building tips built around the principle of prioritizing asset acquisition that every small business owner can implement right now:

1. Buy items that will last a long time 

When acquiring resources for your operations, prioritize items with extended lifespans. These durable assets are designed to provide value for over a year and can significantly contribute to your business's asset base.

Examples of assets that last a long time can include:

• Land
• Commercial buildings
• Essential business equipment
• High-quality office furniture
• A professionally developed website

Unlike immediate expenses, these acquisitions will retain their worth over time, sometimes even appreciating over time. 

2. Choose a mortgage over renting

Many small business owners have to decide whether to rent or buy their operational space. While renting offers flexibility, it can be an ongoing expense with no long-term return on investment. The money you spend on rent disappears each month, providing no accumulating equity or ownership stake.

Opting for a commercial mortgage can transform a recurring payment into an asset-building strategy. A portion of each mortgage payment contributes to the principal, gradually increasing the business's ownership in the property. This builds equity, which can be a valuable asset to sell or leverage. 

Owning your business property provides a stable base for operations and contributes to the business's overall net worth.

3. Get frugal with recurring expenses when possible

Always shop for the better phone deal, watch out for high travel and entertainment costs, and track office supply usage. This way, you’re increasing your profits and can pay yourself more or reinvest back in the business. 

But don’t spend too much time on this; entrepreneurs who spend more time increasing revenue are more successful than those who focus too much on cutting costs.

4. Slow down your replacement of large assets that depreciate quickly

A common financial trap for many small business owners is frequently replacing large assets that rapidly lose value. Cars, in particular, come with a high cost and a rapid depreciation rate, and are often one of the first assets a business owner purchases. 

You might be tempted by the allure of a new, high-end work vehicle every couple of years—it's a common scenario. 

But what if you postponed upgrading to the "latest and greatest" luxury car? This could free up tens of thousands of dollars over several years. If your current reliable vehicle, even a few years old, can still serve you well, you can instead direct those saved funds toward more strategic investments that build long-term business wealth.

5. Slow down on your routine personal expenses 

During the critical startup years of a small business, every dollar counts. For entrepreneurs, personal spending habits can directly impact the business's financial viability. Business owners can free up capital by consciously slowing down on routine personal expenses, such as frequent salon visits or dining out.

Consider reducing some of the following personal expenses while you're getting your business up and running:

• Haircuts and personal grooming services
• Dining out or frequent takeout meals
• Entertainment subscriptions (streaming services, gaming, etc.)
• Nonessential shopping (clothes, gadgets)
• Vacations or nonessential business travel
• Expensive hobbies or leisure activities

6. Work to refinance and reduce credit card debt 

When prospective entrepreneurs cannot secure a business loan, they sometimes use credit cards. But interest, no matter how small, adds up over time. It is an expense that your business should minimize or avoid when possible.

Refinancing existing credit card debt to a lower interest rate, or ideally, paying it off entirely, is a crucial step towards keeping more money in the bank. Minimizing this type of expensive debt frees up cash flow that you can reinvest into assets or use to cover essential operating expenses without the burden of high interest.

7. Use credit cards only to finance assets

If you do need to use credit cards for business expenses, use them to purchase business assets; then, you at least maintain the value of that asset. If you use credit cards for recurring business or living expenses and don’t pay them off each month, you are digging a deeper hole and lowering your net worth, making it harder to build wealth over time.

Investing in assets and reducing expenses will build your business’s net worth, make you more viable for a loan, and increase your profits over time. Look for ways to apply this to your business, and you’ll watch your money grow.

Streamline your accounting and save time

Understanding the difference between assets and expenses is crucial for your small business to build wealth and become successful over time. By strategically investing in lasting assets, you'll set yourself up to make smarter financial decisions every day.

Ready to simplify your business's finances? QuickBooks' accounting software can automate tracking, categorize transactions, and put valuable financial information at your fingertips. Managing your money efficiently is one of the best ways to meet your business goals.