But let’s say you are a business owner and you’ve started your own thing – what you will be dealing with daily are Income and Expenses.
First off, lets start with Income:
Income is, simply put, transactions (which is accounting-ese for anything that needs to be recorded in your accounts) which bring in munn-ayh into your business. If you sell a product and get paid for it, the payment you receive for your product is income!
Lets use an example – you own an apple tree and one day you take your apples to school (or kindergarten, uni, poly-tech, college or preferred educational institution) to sell to your friends. Your friends pay you $5 for each apple (because they are THAT GOOD). This means that the $5 you receive for each apple is known as your ‘income’.
Income is also known by other names such as:
Income is very important for any business because it makes you more money! Why else would you be in business anyway?
In a nutshell, if you get paid by your customers for any products or services your provide, that money received from the customers is your income.
Next, lets look at expense. Expense is the opposite of income. The yin to its yang, the black to its white, the mayo to its marmite (sorry international crowd – that’s a very kiwi reference there). Expense is basically any transaction (there’s that word again!) that takes money out of your business.
Ok, example time – Lets say your apple selling side hustle in school is doing really well and you suddenly have 100 orders for apples a day, so you decide its time to grow and rent an apple stand at the local farmer’s market (plus the principal has been giving you dirty looks for selling on school grounds). The apple stand costs $200 a day to rent. The $200 that you pay to the farmer’s market is an ‘expense’.
Expenses can come in all shapes and sizes, because running a business isn’t cheap – you often must spend money (expense) to make more money (income). So let’s say your apple selling business is booming, you have to employ people and pay them wages (expense!) to help you sell apples. Then you must hire a truck to transport your apples to your apple stand (expense!) to get them to the customers. Then you will want to advertise (more expense!) so that more people will come and buy your apples!
Now expenses aren’t a bad thing because the money you spend will help you generate income in the future – however you want to make super duper sure that you are not spending more money than you are making!
By the end of the day you want to make a ‘profit’ and profit is :
profit = Income – Expenses
Take all the income in your business and minus all the expense in your business over a period and you get your profit. Now if your expense is higher than your profit, you get a negative profit which is known as a ‘loss’ and generally speaking – losses aren’t very good.
Its worth noting that you don’t have to run a business to worry about income and expenses. Even as a regular student and/or salaried worker you receive income (from your paycheck, student loan or mom) and you spend it on stuff to help you live (like rent, electricity, food and video games).
Ok! So you now know what Income and Expenses are – that’s enough to kick-start your sole-trader startup or answer your midterms for your Accounting 101 paper. Stay tuned and we’ll learn more about what a cruel world it is that we live in!