Asset vs Expense

When your business makes a purchase it could fall into one of two categories.

Expense

An expense of the business is a purchase that is immediately impactful on the business, affecting its current year profits.

Expenses are generally the day to day business purchases, and they are recognised in full for the current year.

Capital Asset

A capital Asset, or Fixed Asset, is a purchase that has a long term impact on the business, and is recognised over its useful life via depreciation.

The FRS standards describe fixed assets as follows:
"A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity"

Let's break that down into criteria:

• "Controlled by the entity" - so in the control of the business, though not necessarily owned by the business.

• "As a result of past events" - such as entering into an agreement, or purchasing and item.

• "From which future economic benefits are expected to flow to the entity" - meaning the item generates income, or economic benefits, for the business

Businesses also often use a minimum value for assets that are capitalised. An example could be £100, and a different threshold is sometimes settled upon for different categories of asset.

So Which Is It?

When deciding if a purchase might be a fixed asset, the main question you should ask is: does this item generate my business income for more than the current year?

We have already discussed other points to consider when making this decision, but the biggest part of the decision is the item's ability to generate income over many years.

There are obviously more nuances to it than this, so it's always useful to speak to your accountant.

Hopefully this will give you a general idea of the difference between Capital Assets and Revenue Expenses.