Espresso Machines vs. Espresso Beans

Mar 5

IT’S TIME TO TALK ABOUT FIXED ASSETS

You spent money on a thing. How do you know whether this thing is an asset or just a regular ol’ expense?

To be an asset, this thing needs to meet all of these standards:

It is not consumable, like a supply (printer paper, toner, pens, etc.)
It is something that your business will continue getting value out of for longer than the year it was purchased
It was purchased for at least the set value that you and/or your accountant have determined (usually $500 or $1,000)

Exhibit [A]: An expense, dripping out of an asset.

Let’s run through some examples, ignoring cost for now. Table? Asset. Lifetime supply of paper clips? Expense. Espresso machine to keep you alert enough to get through this post? Asset. Coffee beans for said machine? Expense. Electric scooters to enable your employees to travel from one end of the office to the other? Asset.

Why does it matter?

Well, assets and expenses affect your business financials very differently. An asset will have an impact on your cash flow and your Balance Sheet, but will have no impact on your net income or Profit & Loss.

On the other hand, an expense can be fully deducted in the year it takes place, whereas assets are depreciated over time, which means that their value is divided up and taken as an expense over the length of time that asset has value for the business (generally between 3 and 7 years).

“Memories and fixed asset lists grow murkier with time.”

Tips

Remember to include important details in the transaction memo line when making asset purchases. Include the name of the item, serial number, model number and business use. As clear and memorable as a purchase might be right now, memories and asset lists grow murkier with time.
Twice a year, make sure to review your list of assets to make sure that you [A] still have the ones listed and [B] still get value out of them.