I’m not a CPA, but I did play one on TV (I really didn’t, but I always wanted to say that). As a manager, however, I found that knowing the difference between expensing a purchased item and capitalizing a purchased item occasionally allowed me to purchase more goods and/or services for my department in a given year.
At a high level and from an accounting perspective, when you buy a product or service for your company, it can be accounted for in one of two ways; as an expense or as a capital expenditure. Conceptually, the difference is related to the useful life of the product you purchased. If your purchase will be used within a one year period, then it must be expensed during the current year. However, if the purchased item has a useful life of many years, for example a new truck or a big computer, then from an accounting perspective you can capitalize the purchased item and then expense it over a specified number of years.
In accounting terms, current period expenses must be deducted from your taxes in the current year. Money spent as a long term investment (like a truck or computer) is capitalized, meaning, rather than being expensed in the current year, it is placed on the balance sheet as an asset and then depreciated.
If you have the background to understand what I’m talking about, that’s great. If you don’t, as a manager you should learn a little about accounting. If you are not already doing so, in time you will most likely be involved in budgeting, salary planning, revenue forecasts, and/or approving company expenses. Sorry to tell you, but all of these activities are accounting related. Taking an accounting class or reading a good book on accounting would be a good personal investment in your professional future.
It would also be worthwhile to ask your company’s finance person if any of your department’s expenses can, and should, be capitalized. If the finance person says yes, carefully follow the capitalization instructions. These instructions must be correctly followed because the company may one day be audited to assure that proper capitalization rules were used.
Your first thought may be “Who cares?” The answer is your company’s senior management and finance group may really care. First, if the expense is categorized as a expense, there is the potential for company tax advantages. Second, if the company is publicly held, the capitalization of an expenditure not only increases current net income but also increases the company balance sheet.
Your next question may be “Why do I care?” The answer is twofold. First, as a manager you are part of the company’s management team and you should want what’s best for the company. Second, capitalized expenses are generally budgeted differently than general expenses. Therefore, you may be able to get more money for your department to spend on big stuff, like new computers for your staff. Remember, more money means your department means you can do more things. Generally speaking, investments that make your department more productive are good for your team, your company, and as the department manager, for you.
The primary advice and takeaways from today’s column is to know that:
- Knowing the difference between an expense and a capital expenditure may allow you to get more money for your department
- If you don’t understand accounting, as a manager, taking an accounting class would be of professional value to you
- Manager processes such as budgeting, salary planning, revenue forecasting, and other manager functions require a certain level of accounting knowledge.
For additional information on today’s topic, I suggest the book The Accounting Cycle: A Primer for Nonfinancial Managers (50-Minute Series) by Jay L. Jacquet and William C. Miller Jr.
This blog is an excerpt from my weekly nationally syndicated column with GateHouse News Service. My new columns can be found in GateHouse Media publications throughout the United States.
Until next time, manage well, manage smart, and continue to grow.
President and CTO
Manager Mechanics, LLC