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Small Business Spending – Assets and Expenses

Small business spending can be classified in different ways on financial statements and today we’re going to take a look at how assets and expenses are treated by both accountants and tax collectors.    This will help you to gain a better understanding of the impact of capital spending decisions.

When an asset appears on the balance sheet it may be a piece of equipment, a vehicle or even a building.  The asset will be something that will bring a definite and verifiable value to your business on a long term basis and enhance the productivity of your business.  For instance, if you own a food retail business and you buy a food labelling machine for £10,000 you can take a depreciation expense of £2,000 per year for the next five years.  While an asset is considered an expenditure, it’s not treated as an immediate tax deduction because you will get incremental tax benefits each year on that item of equipment.

An expense is classed as something you use immediately.  For instance, hiring staff to use the food labelling machine to put labels on the food products is an outlay of cash that you will not see a return on.  Your business won’t get any future value from hiring the staff as it’s an immediate expense.  Daily expenses and purchases will appear as expenses (rather than assets) on your income statement.

It can be easy to think that buying an asset (like the food labelling machine) would be a good investment for your business that you can depreciate over time.  However, you first need to find the money with which to buy the asset.  If you have it available, you could pay in cash but that may leave your business short of cash a little later on.  The other option would be to borrow the money to pay for the asset and pay it back over a fixed term, such as five years.  

The advantage of paying cash is that you won’t pay interest on the amount you spend on the asset.  You can show it as a capital asset and it looks as if you’re paying for it over a fixed period in pretty much the same way as if you had borrowed the money to make the purchase.  However, if you don’t have enough cash to make the purchase without risking a cash flow problem later on, then you’ll need to find finance of some sort or lease the machine. 

Avoiding cash flow problems is pretty essential for any small business here in the UK – it can lead to debts that are difficult to pay back or could even lead to your business going under.  When considering the purchase of an asset, it would be best to speak with an account6ing professional who will use your historical data to identify any cash flow issues you may be facing.  An accountant will understand the specific requirements of your business and suggest appropriate outside resources when it comes to raising finance for a capital expense.  A qualified accountant will also advise you on whether a purchase is an asset or an expenditure and offer you expert advice on maintaining a steady cash flow for your business.