Getting philosophical: Expenses vs Assets

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Dániel Fancsali

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Mar 30, 2021, 11:21:26 AMMar 30
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Good afternoon,

I (think I) do understand the textbook definition of the above, but I find myself in doubt in many cases around how I would model a certain transaction.

On the face of it, it is very simple: if I spend $100 painting my room, that's clearly an expense. Buying a car is clearly turning one asset (cash/bank balance) into another one (the car itself).

But then, fitting new wheels to the car is an expense, but then it is also making the car worth more, so at the same time there's an appreciation involved. (Or is the set of wheels another asset, that happens to be fitted to the car "temporarily").

Also, let's think buying furniture: it's an asset, as I either use it long-term or perhaps sell it, when I move, and need different ones for the new house. But it can be also seen as an expense relating to me living in my current accommodation. (Similar to utilities.)

First I thought, the deciding factor might be, whether I can (or whether I expect) the thing to be re-sold.  But as the above examples show, it's not always as clear cut in advance. I might sell it, I might keep on using it, or might sell it as part of another asset (the flat or the car).

So, I'd be really curious, how others see this, and how they keep their books manageable.

Let me know your thoughts.

Regards,
Daniel

Pete Keen

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Mar 30, 2021, 11:29:17 AMMar 30
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Anything I buy as a consumption good I track as Expense. That includes, from your examples, car maintenance and parts as well as furniture. If I'm later able to sell those things I count it as Income. I only track physical assets when I can readily get pricing information and when it doesn't make my life too hard. So for example I track our house as an asset and adjust it occasionally according to Redfin or Zillow's estimates. So for example I track our cars as assets and adjust them according to KBB once in a while. Any appreciation or depreciation gets balanced into Equity because tracking appreciation/depreciation isn't necessary for our personal books.

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Brandon A. Olivares

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Mar 30, 2021, 12:09:30 PMMar 30
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I think maybe you’re slightly overthinking it. An asset is anything whose value you want to track.

If you’re running a business, then you have to get more specific, but in that case you should probably ask your accountant.


“Asset is a resource available to a business that gives it some form of economic benefit in the future.”

Brandon

o1bigtenor

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Mar 30, 2021, 4:02:45 PMMar 30
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On Tue, Mar 30, 2021 at 11:09 AM Brandon A. Olivares
<program...@gmail.com> wrote:
>
> I think maybe you’re slightly overthinking it. An asset is anything whose value you want to track.
>
> If you’re running a business, then you have to get more specific, but in that case you should probably ask your accountant.
>
> I do like the definition given here: https://accountingo.org/financial/statements/difference-between-assets-and-expenses/
>
> “Asset is a resource available to a business that gives it some form of economic benefit in the future.”

Hmmmmmmm - - - - the final statement - - - - imo that is why a house
is not an asset - - - - it is an expense.
Once you have one the expense starts and doesn not finish until you sell.
There is no way to make money with it, generally, without selling it.

Not a popular opinion but it does follow that above definition.

Regards

Martin Michlmayr

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Mar 30, 2021, 10:01:20 PMMar 30
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* o1bigtenor <o1big...@gmail.com> [2021-03-30 15:02]:
> > “Asset is a resource available to a business that gives it some form of economic benefit in the future.”
...
> There is no way to make money with it, generally, without selling it.
>
> Not a popular opinion but it does follow that above definition.

I think you're equating "economic benefit" with "income".

You *do* get an economic benefit from a house -- you get a place to
stay which would normally cost $$$ to rent.

--
Martin Michlmayr
https://www.cyrius.com/

Brandon A. Olivares

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Mar 30, 2021, 10:18:13 PMMar 30
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> On Mar 30, 2021, at 10:01 PM, Martin Michlmayr <t...@cyrius.com> wrote:
>
> I think you're equating "economic benefit" with "income".
>
> You *do* get an economic benefit from a house -- you get a place to
> stay which would normally cost $$$ to rent.

Not to mention other things you can do with a house, such as renting it.

psionl0

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Mar 31, 2021, 3:44:18 AMMar 31
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These are issues that bookkeepers for a business need to deal with frequently. You are mostly on the right track.
Basically, the value of an asset is the amount you could get for it if you sold it. Initially it is the price that you paid for it. If you need to periodically revalue your asset (eg for tax purposes) then you would subtract money from an Income:Appreciation account and add it to the asset account if the value of the asset increased or subtract money from the asset account and add it to an Expenses:Depreciation account if the value of the asset decreased. This is independent of any money that you might have spent on the asset (remember, it is the selling price that counts). Those are sundry expenses.

Fortunately, for most private individuals, you don't need to keep track of the value of your asset while you own it. You only account for it when you sell or dispose of the asset. For example, suppose you buy a car for $10,000. This would be recorded in the usual way:
<date> <seller>
Bank:Bank Account        -$10,000
Asset:Motor Car           $10,000

During the time that you own the car, you would record expenses such as fuel/oil/maintenance/rego in the usual way. When it comes time to sell the car, if you sold it for (say) $5,000 then you could account for the depreciation in the following way:
<date> <buyer>
Bank:Bank Account          $5,000
Income:Asset Sales        -$5,000
Asset:Motor Car          -$10,000
Expenses:Asset Disposal   $10,000

Alternatively, since you don't need to report the income you get from asset sales, you could record this as two separate transactions:
<date><depreciation expenses>
Asset:Motor Car           -$5,000
Expenses:Depreciation      $5,000

<date> <buyer>
Bank:Bank Account          $5,000
Asset:Motor Car           -$5,000

o1bigtenor

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Mar 31, 2021, 6:33:39 AMMar 31
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Hmmmmmmmmm - - - - it sounds like your mortgage is paid off.
If it isn't you are paying the bank for the privilege of living there.
If you look at the value of where you live over the last say 40 years,
you might see that your house value has been hugely manipulated
and its value really isn't what might have been in your price tag
but it does make you feel better when you look at those mortgage
payments.
(I can remember when mortgages were being offered at 19% and
there weren't a lot of takers. Many houses were defaulted to the
lendors at the time. That is also behind my definition - - - which I
do know is not popular but is more accurate than the quite rosy
view held by many. )

Regards

o1bigtenor

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Mar 31, 2021, 6:35:12 AMMar 31
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Hmmmmm - - - at which it no longer becomes your home - - - right?

Regards

Dániel Fancsali

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Mar 31, 2021, 6:43:19 AMMar 31
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Indeed, but then it immediately turns into a business asset in it's most strict definition... ;)

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o1bigtenor

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Mar 31, 2021, 9:09:25 AMMar 31
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On Wed, Mar 31, 2021 at 5:43 AM Dániel Fancsali <fanc...@gmail.com> wrote:
>
> Indeed, but then it immediately turns into a business asset in it's most strict definition... ;)
>

Correct - - - - I would suggest that you be VERY VERY careful with how
this definition is used - - - - your taxation authorities will have a
lot of not
very fun things to say if your definition is some future use - - - - they are
quite adamant that the definition is on 'present' use.

I know someone who had done exactly this - - - - he got to pay back taxes
and a reasonably large penalty. But if you wish to do such yourself - - -
- I'm not going to hold you back.

Regards

Dániel Fancsali

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Mar 31, 2021, 9:19:34 AMMar 31
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Well, to be fair, I am lookint at it through the eyes of a private individual, and the discussion is purely from the "how to best model and track your personal/family finances". In case I'd wanted to start a property business, I probably would spend some money on an accountant...

But very good point nevertheless!

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o1bigtenor

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Mar 31, 2021, 9:49:38 AMMar 31
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On Wed, Mar 31, 2021 at 8:19 AM Dániel Fancsali <fanc...@gmail.com> wrote:
>
> Well, to be fair, I am lookint at it through the eyes of a private individual, and the discussion is purely from the "how to best model and track your personal/family finances". In case I'd wanted to start a property business, I probably would spend some money on an accountant...
>

TL;DR
I stopped using an accountant when I found that accountants really
weren't considered,
by the tax authorities anyway, to be responsible for anything filed -
- - they don't talk to
your accountant - - - they talk to you (if this happens you do have
legal recourse re: the
accountant - - - - - - if you can afford it!). I also found that they
more liked their fees than in actually knowing how to do things.
Remembering Enron
I even argued with a bank when they forced me to use an accountant for
that year.
There were more errors that year than any before or since. As the
government seems
quite insistent on shovelling mountains of information at one I just
take advantage of
that and do my own reading. I have twice had questions that I could
not get answers on even from senior partners at major international
accounting firms.
Doesn't mean that I'd never use one - - - - just think their
usefulness is more than
somewhat overrated and with their cost - - - I prefer to keep those
$$$ in my pocket.

What most call accounting is far more accurately 'record keeping'.
Accounting is what
one does with that collated information. Few do much except for business plans
and then that isn't really what accounting is about. IMO accounting is
a skill whereby
one can look at past behavior of a business and extrapolate and/or
develop future
plans/directions that have a high degree of accuracy. (Business plans
are tools to
show lenders how safe your plans are.) Just looking into the past is
very easy and very safe (that's where most accountants work) but its in knowing
what to do and/or not to do starting from today moving forward where
this skill is
so very valuable. (AIUI today this is commonly called financial engineering - -
I think - - - - :-( !)

If you decide to start a business by definition it is a small business
(if not then this
whole conversation would have been a waste of your time) and if you
hire all the
advisors you are presently suggested to do I would posit that your
likelihood of survival
is diminished to where that possibility is unlikely. The survival of
the businesses of
those advisors will, on the other hand, have had a major improvement due to
your generosity.

Yes big business working very much in the fashion that I'm suggesting
that you not
do - - - but then - - - how often have you seen big business be innovative or
interesting - - - - - they buy those kind of businesses and most often
kill or at
best stifle whatever those small businesses had when they were bought.

Regards

psionl0

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Mar 31, 2021, 12:21:07 PMMar 31
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Interest and rent are both dead money and it takes a bit of reckoning to decide which is the better option.

One inescapable fact is that if you pay the mortgage off then you are in a good place. I estimate that the rent I don't have to pay now is worth at least $500 extra in my pocket every week - TAX FREE. And this is regardless of the market value of my house.
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