Income & Expense

Updated: Oct 17, 2020

Income

Income is the amount that the business generates by selling goods or services or both, or by any other investment activity.


Income can be generated regularly or from one-time activities.

Example: Income received by a business by selling vehicles (where the business is to sell vehicles) is a regular income or a steady source of income whereas income received by selling a vehicle for a business which is into logistics services is a one-time income.


The amount that is generated by carrying out the daily or core business activities is called operating income and the amount generated by carrying out activities other than the core business is called non-operating income.

Example: Income received by selling goods which the company deals in, is operating income and the income received by a company (which is into selling goods) from an investment in securities is a non-operating income.


It is important to distinguish between operating and non-operating activities in order to understand the efficiency of the business operations or make investment decisions.


Expense

Expenses are amounts that a business pays to settle the bills. Example: Purchases of goods, payment to staff, stationary expenses, electricity expenses, rent of premises.


Expenses, like incomes, can be regular or one-time. The examples stated above are regular expenses whereas expenses like payment for warranty or damages, losses on investment or any other legal settlements are one-time expenses.


Expenses can be non-cash expenses as well. For example, depreciation and amortization expenses (explained above) are non-cash expenses. These do not involve any cash outlays and are just entries in the books of accounts.


Again, like incomes, expenses can also be classified as operating (popularly known as OPEX) and non-operating expenses. Operating expenses should be relevant and necessary to carry out the business.

Example: Purchase of goods for reselling is an operating expense whereas purchase of investments by the same firm is a non-operating expense.


Expenses can also be classified as Revenue Expenses or Capital Expense (popularly known as CAPEX).

Generally, regular expenses pertaining to business activities are revenue expenses. Example: payment of rent. Capital expenses or capex are expenses which are one-time investments to acquire tangible or intangible assets . Example: Purchase of machinery for production.


In the financial statements, incomes and expenses appear in the income statement.

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