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TN Standard: BUS. 2.1: 4 Functions of Business

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TN Standard: BUS. 2.1: 4 Functions of Business

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Students will learn about two of the four major business functions. Production & Procurement and Finance & Accounting, and explain how those functions help a business succeed.

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Production & Procurement

Marketing

Management

Finance & accounting.

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What is a Financial Statement? They are written records that convey the financial activities of a company.

There are 3 key Financial Statements:

1. Income Statement

2. Balance Sheet

3. Cash Flow Statement

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Let's Better Understand Financial Statements! 

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Let's Better Understand Financial Statements! 

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Financial Statements Explained in One Minute: Balance Sheet, Income Statement, Cash Flow Statement

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What is Revenue? The money is generated from normal business operations and is calculated as the average sales price times the number of units sold.

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Make sure to remember the formula!

Total revenue = Quantity X Selling Price

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What is Revenue? The Concept and how to Calculate Revenue in Business Explained!

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What are Expenses? Money that is spent to acquire something. There are many types of expenses:

Operating

Non-operating

Fixed

Variable

Accrued

Prepaid

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An expense is money spent to acquire something - expenses includes daily transactions everyone encounters (like paying a phone bill) and big purchases made by companies (like buying a new piece of machinery). While some people may track their personal expenses for budgeting purposes, businesses and accountants have strict guidelines on what counts as an expense.

In this guide, we'll cover:

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Expenses Definition

The simplest definition of an expense is any money spent to get something. For individuals, expenses are common: we all have living expenses like rent or mortgages, utility bills, and groceries.

In business, though, expenses are more strictly defined. This is because businesses can claim certain things as deductions on their taxes, so the U.S. Internal Revenue Service (IRS) has specific guidelines on what does and does not count as a business expense. By IRS standards, a deductible business expense must be both ordinary (typical for the business's industry) and necessary (helpful for the business's functions).

How Are Expenses Reported?

Businesses often use expense reports to compile and track expenses, which are then formally reported by accountants on financial statements, like the income statement. However, when an expense is reported depends on the type of accounting the business uses: the accrual basis or the cash basis of accounting.

In the accrual basis of accounting, the expense is recorded when the transaction occurs, even if money has yet to be exchanged. For example, if a business prepaid a hotel reservation for a business trip, that entire transaction is recorded as a business expense on the day it is booked, even if the money is not charged to the account until check-out.

On the other hand, cash basis accounting records expenses once money has been exchanged. So, if a business uses this method and books a hotel reservation, it wouldn't mark that transaction as an expense until the money is withdrawn from its accounts by the hotel.

Anyone in a business or organization can make expenses, but accountants and finance teams are responsible for tracking and reporting these transactions. For this reason, accountants need to understand the role of expenses in a company's finances, the IRS's tax regulations on them, and the generally accepted accounting principles (GAAP) surrounding how these transactions are recorded and reported.

>>MORE: Experience how accountants review expenses as part of a company's finances with KPMG's Career Catalyst: Audit Virtual Experience Program.

Types of Expenses

Operating

A company's operating expenses include any costs associated with running the business day-to-day. They range from rent and utilities to research and development. Any money spent on the business's core function is an operating expense.

Non-Operating

Non-operating expenses are the opposite of operating expenses - costs that are not directly related to a business's core function. Common examples of non-operating costs include interest payments (the money is going to a lender and isn't directly benefiting the business's daily operations) and currency exchange costs (these are incidental expenses that do not go toward business operations).

Fixed

Fixed expenses stay the same regardless of the company's production flow. Even if a company pauses production for a month, the company needs to pay for these things. These obligations include mortgages or rent, employee salaries, insurance costs, loan payments, and property taxes.

Variable

Variable expenses change regularly, typically because of increases or decreases in a company's production. These are the opposite of fixed expenses. Variable costs include payroll for hourly employees, commission on sales, utilities, shipping costs, and certain raw materials. Essentially, if the cost isn't exactly the same each time, it counts as a variable expense.

Accrued

Accrued expenses are transactions a company needs to pay, such as rent or mortgages, but has not yet paid. For example, if a company receives a shipment of raw materials used for production, but the supplier hasn't yet sent an invoice for the transaction, the amount owed is an accrued expense.

Prepaid

A prepaid expense is the direct opposite of an accrued expense. Prepaid expenses are transactions the company has already paid for before receiving the product, good, or service. For example, if a company prepaid for a shipment of raw materials, but the supplier hasn't delivered the materials yet, the amount paid is a prepaid expense.

Expenses Example

Using Apple's 2022 year-end report, we can see how a business details its expenses on financial statements.

This consolidated statement of operations shows that Apple divides operating expenses into two categories: research and development and selling, general, and administrative. These two categories represent the type of daily expenses Apple typically incurs: staying ahead of the competition by investing in research and developing new products and the costs associated with selling its existing products.

How a company chooses to break up expenses on financial statements largely depends on the primary operating activities of the business. Some companies may divide operating expenses into even smaller categories, such as costs related to marketing activities or technology investments. Other companies may group all operating expenses together as one category, though.

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Expense vs. Expenditure

The line between expenses and expenditures is subtle but important. Generally speaking, an expenditure is the total cost of a transaction, while an expense is that transaction's offset to a company's revenue.

A type of transaction that highlights this distinction is capital expenditures. Let's say a company wants to buy a new production plant for $39 million. Rather than paying all at once, the company needs to capitalize this cost for tax purposes. So, the company spreads the $39 million out over the plant's lifetime. Since buildings typically have a 39-year lifespan by IRS standards, the company would claim $1 million in expenses towards the building every year for 39 years.

The total cost of the plant ($39 million) is an expenditure, while each annual chunk of that cost ($1 million each year) is an expense.

>>MORE: Learn more about expenditures.

Showing You Understand Expenses on Resumes

Expenses are a daily occurrence in many business and accounting roles, so a potential employer would likely assume you understand expenses if you have prior work or internship experience in finance.

You can still mention expenses in the description of your work or internship experience, though. Some great ways to weave it into your resume include:

Describing an instance where you compiled and created financial statements for a company

Explaining how you innovated or improved a company's expense reporting system

Discussing a time when you caught a mistake on an expense report which prevented the company from a potentially disastrous tax season

Accountants and business owners alike need to understand the role of expenses within a company's finances. Other important things for business and finance professionals to know include:

Explore these skills and more with Forage's free accounting virtual experience programs.
Image credit: Canva

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What Are Expenses? Definition, Types, and Examples

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Expenses are usually the costs associated with running a business. Learn more about the types of expenses and how they are reported.

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What are Assets? A resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit.

Examples of Assets:

Personal assets - Home, Land, Jewelry

Business assets- Machinery, buildings, equipment

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Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

If you thought that only the wealthy have assets, you're about to become wealthy. Practically everybody owns assets-they're nothing more or less than a thing of value that can be sold for cash.

What Is an Asset?

An asset is a possession that can be exchanged for cash. Your car is an asset, just like the money you hold in your checking account. That furniture in your living room? Even though your partner's couch might not be your favorite, it's still an asset.

"An asset is a thing that you own outright that holds value," says Katharine Perry, certified financial planner (CFP) and financial advisor at Fort Pitt Capital Group. You can own an asset as an individual or jointly with someone else, like a parent, partner or spouse.

For a company, assets are considered to be anything that will provide it with a positive future economic benefit. This could mean equipment used in manufacturing or intellectual property such as patents.

The opposite of an asset is a liability, which is money you owe.

Types of Assets

While countless things can be considered assets, they don't all fall into the same class. The four main types of assets are liquid assets, illiquid assets, tangible assets and intangible assets. We'll also look at two additional types of assets that are important for businesses.

Liquid Assets

"A liquid asset is an asset that can be quickly and simply converted into cash while retaining its market value," says Sara Rajo-Miller, investment advisor at Miracle Mile Advisors.

Examples of liquid assets include:

Cash and Cash Equivalents. From the money in your wallet to the cash you have in your checking or savings account and even some certificates of deposit (CDs), these assets are ready to spend when you need them.

Equities. These include shares of stock held in your favorite companies that can be easily sold on a stock exchange. Equities also include equity-centric mutual funds and exchange-traded funds (ETFs).

Fixed Income. From several types of bonds to fixed income mutual funds and ETFs, these are easily liquidated for cash on exchanges similar to equities but also pay a fixed interest rate. Hence the name "fixed income."

Illiquid Assets

Illiquid assets are assets that cannot be quickly or easily sold for cash.

"If it takes longer than 90 days or you would need to sell it at a significant discount in order to convert it to cash, the asset would not be considered liquid," says Jeffrey Wood, certified public account (CPA) and partner at Lift Financial.

Some examples of illiquid assets include:

Antiques and Art. While many antiques are highly valuable, they take a specific kind of buyer to recoup their worth if you need to sell. Finding a discerning buyer for a painting or rare piece of furniture, for instance, could take an appraiser, broker and time.

Collectibles and Sports Memorabilia. While invaluable to you, any kind of collectible or sports memorabilia has a defined market and audience. These audiences can drive an asset's value up or down due to demand. Therefore, selling these types of items tends to take time and targeted marketing.

Jewelry. While lovely to look at, jewelry generally takes time to sell at a fair market price. If you're thinking there's always the pawn shop, remember that they're not exactly known for offering fair market prices to sellers.

Real Estate. This includes your primary home, vacation homes and rental property. For businesses, it's their office and warehouse space or retail storefronts. Depending on the market, real estate can take months to sell, making it a highly illiquid asset.

Tangible Assets

Tangible assets are assets you can touch. They can be either liquid assets, like the $20 bill in your wallet, or illiquid assets, like a vintage crystal vase or a ski cottage in Vail. Businesses would consider their land, machinery, office furnishings and supplies tangible assets. Even stocks and bonds are technically considered tangible assets because they used to be-and sometimes still are-issued with physical certificates.

Intangible Assets

If you guessed that intangible assets are assets you can't touch, you're on the right track. "An intangible asset is [one] that is not physical in nature and does not include liquid or illiquid assets," says Rajo-Miller.

Much like tangible assets, intangible assets are most often referred to in the context of business. Think of them as the ideas that animate a successful business. Some examples of intangible assets include:

Brand recognition and reputation. For a company or noted expert, their brand is a driving force behind revenue. As brand recognition increases and more good word is spread about a brand, the value in the marketplace increases.

Intellectual property. Think about the Nike "swoosh" logo and the Apple's iconic apple cutout. A logo or trademark can be an asset, along with any copyrights, patents or trademarks an individual or company owns.

Current Assets and Fixed Assets

While businesses have assets in all the categories above, there are two additional types of assets worth mentioning here: current assets and fixed assets.

Current assets are any assets a company holds that it expects to use or convert to cash in the span of a single year or operational cycle. Think of a company's current assets as things like inventory waiting to be purchased and shipped, the money that customers owe them, and cash or cash equivalents. The key to understanding current assets is that they're held by the company for a short period of time and are not expected to appreciate in value over time.

Fixed assets are assets a company owns that create other things of value and generate income. Assets in this class aren't expected to be used up or spent in the short term. Think of them as long haul assets like machinery, delivery vehicles and real estate.

Why Do Assets Matter?

Assets matter because they are the tools you use to maintain and improve your standard of living-they sustain you through life's challenges, and later in life you rely on them to retire, thanks to the proceeds they generate while you hold them.

Assets also matter because they let you determine your net worth, which is a measure of your personal wealth. You need to understand your net worth when applying for a mortgage or car loan or planning your retirement. And if you hit hard times, like a divorce or bankruptcy, you'll need to know your net worth to have a clear picture of everything you own.

How Do You Determine the Value of Your Assets?

Asset value is calculated a few different ways. The discounted cash flow approach, the cost approach and the comparable/relative valuation approach are the most common, says Rajo-Miller.

Discounted Cash Flow Approach uses expected future cash flows to calculate an asset's current value.

Cost Approach calculates value based on the cost of an asset or similar assets, plus the cost of any improvements to said asset minus depreciation, or the value it loses through age or use. This valuation method is primarily used for real estate.

Comparable/Relative Valuation Approach derives an asset's value by comparing the asset to competitors or industry peers. For example, if you were considering buying a stock, you can compare its P/E ratio with other comparable stocks in the same industry to make a decision on whether you should buy it. This valuation method is primarily used for assessing businesses.

If you're an average investor or consumer, though, Wood offers as easier way to determine the value of an asset: "The biggest question that must be asked is 'What is another person or company willing to pay for this asset?'" he says.

In that sense, then, the old adage rings true: What something is worth is what someone's willing to pay for it when you're ready to sell.

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If you thought that only the wealthy have assets, you're about to become wealthy. Practically everybody owns assets-they're nothing more or less than a thing of value that can be sold for cash. What Is an Asset? An asset is a possession that can be exchanged for cash.

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What are Liabilities? Something a person or company owes, usually a sum of money.

Examples of Liabilities:

Loans

Accounts payable

Mortgages

Deferred revenues

Bonds

Warranties

Accrued expenses

Employee wages and benefits

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Let's Better Understand The Difference Between Assets & Liabilities! 

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Let's Better Understand The Difference Between Assets & Liabilities! 

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Assets and Liabilities Defined, Explained and Compared in One Minute