Income and expense
Income XE "income:definition" and expense XE "expense:definition" are simple enough. Income is money coming in, and expense is money going out, right? Wrong! “Income” and “expense” as used in accounting,
are not that simple. (“Income,” as used
here, is properly called revenue, but
“income” is commonly used.)
Money coming in is cash received, and money going out is cash disbursed.
So the business is a
landscape maintenance service, and does some
gardening work. The property owner pays
$50 cash. This adds directly into the
“cash” asset on the left side of the balance
sheet. Just for illustration, we will
“close the books” after this one revenue
transaction. Cash is up $50, and owners
equity is up $50. This difference is
income. Income is closer to an
ownership of cash (or other assets)
received. A more descriptive term for
income would be
“On-the-way-to-add-to-equity.” Of
course, the term “income” sticks, but in
double entry accounting, it refers to owner's
equity coming in.
In the course of this job,
the gardener spent $20 for fuel and disposal
of the garden trimmings. The cash
disbursement takes away from the assets on
the left side. The expense is the other
side of the double entry, and could be called
“taking-away-from-equity.” Again, the
expense is related to the equity area of the
balance sheet.
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