1.20 ASSETS VS EXPENSES

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There is close link between Assets and Expenses

1.20 ASSETS VS EXPENSES

Assets:

An asset is:

1. A resource controlled by the entity

2. As a result of past events (transactions)

3. From which future economic benefits are expected to flow to the entity

Expenses:

Expenses are:

1. Outflows of economic benefits

2. That will either:

• Assets

• Liabilities

3. With the ultimate effect of:

• Owner’s Equity

© Michael Allison. Author’s permission required for external use.

The diff erence is in economic benefi ts :

When the economic benefi ts of an item will be consumed in the future , this represents an Asset

When the economic benefi ts of the Asset are actually consumed (used up) , this represents an Expense

Example: a fi rm purchases a delivery truck for $20,000 on 1 January 2015 that will last for 4 years

2015 2016 2017 2018

$20,000 delivery truck

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

At 1 January 2015 , the fi rm has:

Assets of $20,000 – $20,000 of the economic benefi ts of the truck wi l l occur in the future

Expenses of $0 – $0 of the truck has been consumed (used up)

2015 2016 2017 2018

$20,000 delivery truck

Asset $20,000

Expense $0

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

At 31 December 2015 , the fi rm has:

Assets of $15,000 – $15,000 of the economic benefi ts of the truck wi l l occur in the future

Expenses of $5,000 – $5,000 of the truck has been consumed (used up)

2015 2016 2017 2018

$20,000 delivery truck

Asset $15,000

Expense $5,000

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

At 31 December 2016 , the fi rm has:

Assets of $10,000 – $10,000 of the economic benefi ts of the truck wi l l occur in the future

Expenses of $10,000 – $10,000 of the truck has been consumed (used up)

2015 2016 2017 2018

$20,000 delivery truck

Asset $10,000

Expense $10,000

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

At 31 December 2017 , the fi rm has:

Assets of $5,000 – $5,000 of the economic benefi ts of the truck wi l l occur in the future

Expenses of $15,000 – $15,000 of the truck has been consumed (used up)

2015 2016 2017 2018

$20,000 delivery truck

Asset $5,000

Expense $15,000

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

At 31 December 2018 , the fi rm has:

Assets of $0 – $0 of the economic benefi ts of the truck wi l l occur in the future

Expenses of $20,000 – $20,000 of the truck has been consumed (used up)

2015 2016 2017 2018

$20,000 delivery truck

Asset $0

Expense $20,000

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

The diff erence is in economic benefi ts :

When the economic benefi ts of an item will be consumed in the future , this represents an Asset

When the economic benefi ts of the Asset are actually consumed (used up) , this represents an Expense

$20,000 delivery truck

Asset

$20,000

Year 0

Year 1

Year 2

Year 3

Year 4

Expense

$5,000

Asset

$15,000

Expense

$10,000

Asset

$10,000

Expense

$15,000

Asset

$5,000

Expense

$20,000

1.20 ASSETS VS EXPENSES

© Michael Allison. Author’s permission required for external use.

TASK

In-class Homework

Ex1.3 XEx1.4 XEx1.5 XEx1.6 XEx1.7 X