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Recording Cost Outlays and Expenses

When a company purchases something (on account or with cash), that item can be recorded as either an Asset or an Expense. Some of these are obvious: the purchase of a truck is an Asset and the payment of the utility bill is an expense, however, others are a mixture of the two. Consider the purchase of office supplies. They can be considered an asset or an expense. The asset portion is the amount of supplies left after the accounting period and the expense portion is the amount **used up** during the accounting period. Items like insurance, rent or taxes are considered assets because they are pre-paid and thus their usefulness has not been **used up** yet. The rule is as follows:

If the cost is used to purchase something that will help to produce revenue in future accounting periods it is an Asset.
If the cost is used to purchase something that will be **used up** in the current accounting period it is an Expense.
Example:
On February 1, Phil’s Photography purchases a one-year insurance policy for $1200.

That purchase would be considered an Asset purchase. The insurance policy will be **used up** over the course of the year but at the time of purchase, that $1200 represents an asset of the company.