Concept explainers
For each of the following costs, indicate whether it should be recorded as an asset or recorded as an expense at the time of the transaction:
- 1. Payment for employee salaries
- 2. Purchase of new delivery truck
- 3. Rent paid in advance
- 4. Rent paid in arrears (after use of the building)
Classify the given costs as assets or expenses at the time of transaction.
Explanation of Solution
Assets: These are the resources owned and controlled by business and used to produce benefits for the company. Assets are classified on the balance sheet as current assets, non-current assets, property, plant, and equipment, and intangible assets.
Expenses: Expenses are costs incurred for the operations of a business. The costs incurred for generating revenues are rent expense, depreciation expense, general and administrative expenses, selling expenses, and utilities expense.
The classification of the transactions is shown below:
- 1. Expense – Payment of the salaries to the employees is recorded as an expense.
- 2. Asset – Purchase of a delivery truck is recorded as an asset.
- 3. Asset – Payment of rent in advance is recorded as an asset.
- 4. Expense – Delay in the payment or payment of the rent in arrears is an expense.
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