The Meaning of Revenue and Expense

The meaning of revenue and expense

The trial balance does not make any distinction between flows of income and flows of capital, neither does it make a distinction between expenditure incurred to earn revenue and expenditure on the acquisition of asset. The Double-entry Book-keeping and Periodic Measurement log first problem is to identify the revenues of the year, and this is a matter of definition. By revenue we mean the flows of funds, that is money or rights to money, which have resulted from the trading activities of the business, as distinct from funds (capital) invested by the owner or loans made by creditors and other3 In this case, the only revenue item sown on the trial balance is the revenue from sales amounting to £70,000.LThe second problem is to identify the expenses. We define expenses as the costs of running the business during the accounting period. By contrast, capital expenses are the costs incurred in acquiring fixed assets or adding to the income-earning structure of the firm. The calculation of periodic income is by means of a formula which deducts expenses from revenues:

Periodic income = Revenues - Expenses

Looking at the trial balance, the expenses of the year, as defined, are as follows:

Purchases 31,000

Rent 4,500

Salaries 22,800

Insurances 400

Motor expenses 2,000

Light and heat 1,000

General expenses 300

(An alternative way of defining expenses, which is the definition adopted by accountants, is to treat as expenses all those costs the benefit of which has been exhausted during the year.)

Looking at the expenses which we have identified in the trial balance, it is clear that the(benefit derived by the firm from expenditure on these items is limited to the accounting period. The only exception is the goods purchased which have not been sold by the end of the year and we shall discuss this problem later.

We have completed, therefore, the first stage in periodic measurement by identifying the revenue and expenses attributable to the 'income-earning' transactions of the firm during the year, which we may list as follows:

Purchases 31,000 Sales 70,000

Rent 4,500

Salaries 22,800

Insurance 400

Motor expenses 2,000

Light and heat 1,000

General expenses 300


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Read on: Identifying the Revenues and Expenses of the Period

Identifying the revenues and expenses of the period

The data recorded in the accounts system provides the basis for identifying the revenues and expenses of an accounting period. Firstly, we need to extract from the accounts system the data recorded in respect of all the transactions concluded in the period. The summary of all the transactions is obtainable by means of a trial balance drawn up on the last day of the accounting period.

... see: Identifying the Revenues and Expenses of the Period