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Income and Expenditure
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Profits and losses result from income and expense transactions. Surplus income, above expenditure, results in profit. Selling a product or rendering a service mainly generates income. Other forms of income are; interest received, profits with a sale of fixed assets, or commissions earned. An expense results when the business pays money or incurs a debt without receiving a lasting asset in return.
Some expenses could be directly linked to the manufacturing process. This should be treated differently but will be explained at a later stage.
Typical examples of business expenses are:
- Telephone
- Water and electricity
- Salaries and wages
- Stationery
- Cost for maintenance
- Advertising cost
- Rent paid
It is important to note that when a business pays money (or incurs debt), it could result in either assets or expenditure. To calculate profit, only expenditure, and not assets, are subtracted from income.