What are assets?

What counts as an asset?

The test is whether the business controls something that will bring future benefit. Money in the bank obviously qualifies. So does a van, stock on the shelf, an invoice a customer has not yet paid, and rent paid in advance. A brand or a customer list can be an asset too, though small businesses rarely put a value on those.

Assets are split by how quickly they turn into cash. Current assets — cash, debtors, stock, prepayments — are expected to be used or collected within a year. Fixed assets — vehicles, equipment, property — are kept and used over several years, and lose value gradually through depreciation.

What is not an asset is anything already used up. Fuel bought and burned, a month's rent, an advertising campaign that has run: those are expenses. The line between the two is usually clear, and where it is not, the size of the item and how long it lasts decide it.

A worked example

A self-employed joiner takes stock of what he owns on 5 April. His van is worth £9,500 after depreciation, his tools £2,800, the business bank account holds £4,100, customers owe him £3,200, and there is £600 of timber in the workshop.

Total assets are £20,200: fixed assets of £12,300 and current assets of £7,900. He owes £6,700 in supplier invoices and VAT, so his net assets — what the business would be worth if he collected everything and paid everyone — are £13,500.

A year later the van has depreciated, the bank has changed, and the debtors are different people. The list is a snapshot, and it is redrawn at every year end.

When is a purchase an asset rather than an expense?

The rule of thumb is durability and size. A £2,000 table saw will be used for years, so it is a fixed asset, written down over its life and claimed through capital allowances. A £20 set of drill bits will be blunt by Christmas, so it is an expense.

Most businesses set a threshold — a few hundred pounds is common — below which everything is expensed regardless. It is a policy, not a law, and the point is consistency. Sole traders on the cash basis can deduct most equipment as an expense anyway, with cars the main exception.