The basic accounting equation explains how assets equal liabilities plus equity. The accounts that make up these assets, liabilities and equity are detailed on the company’s Balance Sheet. Income (or loss) is a part of the Equity section, and this information is detailed on the Income Statement. Revenues and expenses from a specific period of time are on the Income statement.
So what are expenses and revenues? Expenses are costs of doing business during a set period of time, usually a month. These can vary from rent to payroll. Revenues are earned during the same period of time. Depending on if the company is cash or accrual based, these revenues can be real or accrued, meaning that either cash or a receivable respectively is associated with them.
Income Statements Show Profits and Loss
In order for these expenses and revenues to impact only the reporting period, sometimes they must be posted as assets or liabilities. Let’s say that Business A pays their rent every month and receives cash receipts immediately upon service rendered. This company can post their rent and cash received as current expenses and revenues. [Read more…] about When Expense becomes Asset and Revenue becomes Liability