- Tubelator AI
- >
- Videos
- >
- Education
- >
- Understanding Income and Expenses in Finance: A Comprehensive Guide
Understanding Income and Expenses in Finance: A Comprehensive Guide
Learn about income and expenses in finance with this detailed guide. Explore core income from selling goods and services, as well as non-core income examples like selling scrap and earning interest. Gain insights into key financial concepts to enhance your understanding of financial statements.
Install Tubelator On Chrome
Video Summary & Chapters
No chapters for this video generated yet.
Video Transcript
Friends, welcome to video 8c which is about income and expenses.
This is sequel to video 8 in which I had introduced 7 key concepts which help us to understand
financial statements.
In this video I am going to deal with income and expenses in a little greater detail.
What is income?
Income is what the company earns, please note this word, earns by selling goods and services.
Now we can call this as core income of the firm.
In addition, there would be non-core income.
Can you think of any example?
I am sure you must have thought of a number of examples but let us think of when a company
sells scrap which is arising out of the production process or it earns interest on the deposits
that it may have kept with a bank or it earns dividend on some of the share investors.
investments that it may have done. So obviously
selling scrap, earning interest, earning dividend are not a core part of the activity.
But friends before I go further, let's spend a little more time on the concept of earn that I used just now.
When can we say that the company has earned the income by selling goods and services?
We can say that the company has earned only when it has delivered
contractually what it was supposed to deliver. We had in an example of the
vegetable vendor elaborated on this concept of earning also. So concept of
earning is very critical in recording income not the timing of receipt. When we
have earned the income that's the time income has to be recorded even if the
collection of money may happen later or in some cases collection of money may
happen in advance too.
So, as I already mentioned, income has to be recorded as soon as it is earned without
waiting for actual collection of money.
So, when the seller has done everything that a seller got to do as per the contract, the
accountants would record income as I have already elaborated.
Also expenses as we have already discussed are use of a resource in the process of earning
income.
Just like income must be recorded when it is earned, expenses must be recorded irrespective of whether money is paid to the vendor.
This concept is called as accrual of expenses.
So let us take an example.
Let's say an executive of the company has undertaken travel in the month of March of a calendar year.
Typically in India, the year which is followed for accounting purposes is April to March.
March. So this is typically the last month of the financial year. Let us say
that the executive has undertaken the travel but the travel agent is yet to be
paid. The actual payment happens in the next financial year. Let's say in the
month of May but the accountants would record the travel expense in the
previous financial year which ended in March itself because the executive has
undertaken the travel even if the payment happens later. This is the concept of accrual.
So as soon as the resource is used, an expense must be recorded.
Expenses can be categorized in different ways but two popular ways of categorizing expenses
are by head of expense or by nature of the expense. For example, it could be raw materials,
travel, transportation, communication, salaries, energy. These are all examples of categorization
of expenses by their nature.
or by head.
But there is another way of classification which is internationally used and that is
by function.
You could classify your expenses as manufacturing expenses, selling, research and development,
administrative.
