A critical issue for accountants is the decision whether an expenditure should be recorded as an asset or an expense. The distinction between asset and expense is not always clear. In certain instances, businesses have been forced to restate their financial statements because management has recorded an asset when an expense should be recorded. The "All About You" feature indicates that post-secondary education results in
higher earnings over an adult's working life and thus the money you are spending on your education today should be of significant future benefit. The question then is whether your education would meet the accounting definition of an asset or an expense.
Instructions
(a) Consider the nature of the cost of your education. What factors suggest that it should be considered an asset?
What factors suggest that it should be considered an expense?
(b) Do you think the nature of the program you're taking should affect whether the cost of your education should be considered an asset or an expense? Explain.
(c) Economic theory suggests that people will always consider the benefit and cost of any expenditure and only incur the cost if the expected benefit is greater. Wouldn't this mean that every expenditure would meet the definition of an asset? Would you consider the cost of a vacation to Hawaii to be as valuable as a year of college?
Would you record them both as assets on a personal balance sheet? Why or why not?
(d) If you were applying for a loan, what might the potential effect be on the success of your application if you understated your assets? What might be the potential effect on the bank if your assets are overstated and expenses understated?