Income and expenses are the accounts that are contained in the Profit and Loss Statement or Statement of Earnings. They are also referred to as nominal or temporary accounts. This is because they are reported for in a specific accounting period, its balances closed at the end of the accounting year or year of operations. End-of- year balances of income and expenses are closed to the owner’s capital accounts.
In Accounting, revenue is income earned for rendering services in case of a service company. For a company engaged in selling merchandise or goods, revenue is income derived from sales of goods to customers.
It is very important to note that in accounting, Sales or Service Income comes from the normal business activities of the business. Sales or Service Income does not come from other revenue generating activities which is not part of the normal operations of the business. For example, a company engaged in buying and selling of merchandise like groceries sold an old building it have previously owned. The sale of the old building will not form part of the Sales of the business but will be reported as other revenue if it realize a gain for selling the asset.
If a company is using accrual basis of accounting, sales are recognized and recorded when the goods are delivered to the customer even without receiving payment. In case of service income, the revenues are recognized and recorded when the services are rendered to the customer.
Revenues can come in different forms and accounts as follows:
- Sales – this means the revenue generated from selling merchandise in the case of merchandise business.
- Service Income – this means the revenue generated from rendering services in the case of services business.
- Interest Income – the interest earned from bank deposits.
Income or revenues have normal credit balance so that when the revenue is earned and recognized, it is recorded as a credit to Sales in case of sales of merchandise to customer and debit cash if the customer pays in cash. If the customer payment is on terms, accounts receivable is debited instead of cash.
Expenses are costs that are incurred as a result of the business efforts to generate revenue and pay for its business operations. The cost of purchasing the merchandise for sale is called as cost of sales or cost of goods sold. For service business, the cost to render the service to customer is referred to as service costs.
Other expenses that are incurred by the business related to selling and running the business include the following:
- Salaries and Wages – this can be further classified into sales department salaries, office staff salaries
- Rental – this can be further classified into office, store or warehouse rental.
- Electricity and water
- Supplies – this could be in form of store supplies or office supplies.
- Insurance expense – can be in form of employees’ insurance, store building insurance
- Interest expense – in the form of
- Depreciation expense – this expense is not actually paid out in cash but in the form of depreciating the value of the asset in the form of depreciation.
Expenses are recorded as a debit to the corresponding account and credit to cash if paid in cash. If the expense is not yet paid in cash, the credit would be to a liability account.