What are Income / Expenses: The definition of income and expenses operational
Income is an increase in financial assets. The financial assets are made up of the existing cash and cash equivalents, minus the liabilities. Income is generated, for example, from the sale of goods or the provision of a service. The expenditure denotes a reduction in financial wealth. Operating costs such as rent, energy costs, wages or the purchase of goods can be described as expenses. There are different terms, especially in the commercial sector, but they all have the same meaning. Also known as revenue spending bill called net income method, does not count on income and expenses, for example, but on deposits and withdrawals. Compared to the accounting, receivables are not booked.
A revenue is, for example, the sale of a computer worth 2,000 euros to a company that receives an invoice for it. This results in a monetary claim in the amount of 2,000 euros. So there is an intake.
This example can also be used to explain the output. The computer is delivered from a supplier to the reseller for 1,000 euros. The period within which the supplier’s invoice must be paid is, for example, 14 days. The liabilities increase by 1,000 euros and the financial assets decrease by this amount. There is thus an issue.
But there are also delimitations. Not all costs are associated with expenses at the same time. An example of this would be depreciation. These represent costs that arise, for example, due to factors such as production. For example, the operation of a production machine that consumes energy, among other things. Here the depreciation causes costs, but does not lead to expenses. Here only the initial investment, i.e. the purchase of the production machine, is an expense.
Demarcations to deposits and withdrawals
According to Howsmb, there are also differences in income and deposits. Although these two terms overlap, they are by no means congruent. This can be explained very well using a loan. If a company receives a loan of EUR 20,000, this is simply referred to as a deposit. There is no income as not only has funds increased, but also payment liabilities.
The term payout is also very easy to explain. For example, there is an issue when a machine is purchased. If this is paid in cash, it is referred to as a payout because the funds were withdrawn from an account in cash. There is still an issue, regardless of whether the machine was purchased on account or in cash.
More terms about income and expenses
When it comes to income and expenses, there are different names and ways in which they come about. Below are some explanations of the various terms used for income and expenditure in the commercial sector.
Income is, for example, income that is generated through the sale, production or service to third parties. That can be the sale of a car, but also the caretaker service in a high-rise building.
A service is the equivalent of the provision of services, for example the creation of a website, which is billed. Services, together with income, form the proceeds or profits from external accounting. Services include, among other things, sales, storage services (for example, the storage of tires for customers), the company’s own consumption and active own work.
The total amount of money used for goods or services in a billing period is referred to as expenditure. More precisely, this means that expenses that have to be spent on creating a product for a customer, for example, are displayed as expenses.
When it comes to the consumption of funds, one speaks of costs of production factors that are required to manufacture products.
Summary explanation of income and expenditure
Income is understood to mean the actual cash inflow of a company, which is supplemented by the outstanding receivables and liabilities. There are two different variants for this. On the one hand the capital releasing income, and on the other hand the capital injecting income. In the case of capital-releasing income, money flows into the company through, for example, the sale of fixed assets or through sales. In the case of capital injecting income, money flows into the company either through shareholders or through undistributed profits.
Expenses are therefore the company’s actual financial outflows, which are reduced by the outflow of receivables and liabilities are added. As far as the finances of a company are concerned, a distinction is made between expenses. The capital tie-up means that the company will later have money at its disposal, for example through loans granted or sales. Expenses that are referred to as capital withdrawing generally mean that they no longer lead to income later.