Unformatted text preview: publisher sells a book to a store for resale. • Expenses (usually called operating expenses): ofﬁce rent, administrative and marketing and
development payroll, telephone bills, Internet access, all those things a business pays for but
doesn’t resell. Taxes and interest are also expenses. • Proﬁts (also called Income): Sales minus cost of sales minus expenses. CHAPTER 14: ABOUT BUSINESS NUMBERS 14.3 Assets vs. Expenses
Many people can be confused by the accounting distinction between expenses and assets. For
example, they would like to record research and development as assets instead of expenses, because
those expenses create intellectual property. However, standard accounting and taxation law are both
strict on the distinction:
• Expenses are deductible against income, so they reduce taxable income, but expenses cannot
be depreciated, ever. • Assets are not deductible against income, but assets whose value declines over time (usually
long-term assets) can be depreciated. Some people are also confused by the speciﬁc deﬁnition of start-up expenses, start-up assets, and
start-up ﬁnancing. They would prefer to have a broader, more generic deﬁnition that includes, say,
expenses incurred during the ﬁrst year, or the ﬁrst few months, of the plan. Unfortunately, this would
also lead to double counting of expenses and non-standard ﬁnancial statements. All the expenses
incurred during the ﬁrst year have to appear in the Proﬁt and Loss statement of the ﬁrst year, and all
expenses incurred before that have to appear as start-up expenses.
This treatment is the only way to correctly deal with the tax implications and the proper assigning of
expenses to the time periods in which they belong. Tax authorities and accounting standards are clear
What a company spends to acquire assets is not deductible against income. For example, money spent
on inventory is not deductible as an expense at the point when you buy it. Only when the inventory is
sold, and therefore...
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This note was uploaded on 01/26/2014 for the course BUINESS 102 taught by Professor Unknown during the Winter '09 term at University of Phoenix.
- Winter '09