An expense is an amount paid for an item or service that provides a benefit to the business. But so is a capital expenditure. The difference is that an expense item is generally "used up" within one year while a capital expenditure usually provides an enduring benefit. Pens, pencils, ink/toner, fuel, utilities, and office cleaning services are all expenses used up in the year. Office furniture, computers, tools, equipment and vehicles all have useful lives longer than one year.
There is an additional, somewhat arbitrary, threshold of $500 to $1000 that is often used to separate an item that will be expensed from an item that will be capitalized - the thought being that a more expensive item usually lasts longer.
The treatment of these expendtures is different - an expense is fully deducted from revenue in the year it is acquired while a capital expenditure is amortized over a longer period and a portion of the cost is deducted from revenue each year.
Small and new business owners often mix these up. While reviewing the accounts as we prepare their year-end and tax we'll see laptops purchased and deducted in full as an expense. Or there will be a small item added to the asset account (capital item) because the owner doesn't understand the difference between the expense and asset account labels in their Quickbooks or Sage 50 program.
It's an easy mistake for a newbie. What's the diffference between "Office Furniture and Equipment" and "Office Supplies"?
Getting the right advice when setting up your business is always a good idea and, from experience, a lot cheaper in the long run than fixing mistakes later on.
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