Income and expenditures are the foundation of any business. The definition of income and expenditures encompasses different areas and types of transactions, as different professional disciplines see them in ways relevant to their specific situations. Understanding the different types, especially expenditures, enables companies to record financial data more accurately.
Income has different definitions depending upon the specified area of business. General income is cash or an equivalent that results from wages or salaries, rent from land or a building or interest, dividends or profit from an investment.
The formal accounting definition of income is the excess of revenue over expenses for a given accounting period. The same definition applies to gross profit or earnings. If a company's total assets increase in any accounting period, this amount also qualifies as income.
In economics, income defines something slightly different. Economists view revenue as the maximum amount of money a person spends during any given period without becoming worse off. In economic terms, income is the real driver of the economy, since buyers' demand for goods and services can only exist if buyers have income to spend. Money, royalties, an endowment or any other type of payment that a person receives on a periodic or regular basis also qualifies as income.
An expenditure is cash or a cash equivalent paid in exchange for goods and services. An expense may also be a charge against available revenue, as in the case of an invoice awaiting payment. A revenue expenditure pays for goods and services that the business uses within a short time frame, such as one year or less. If a business makes an expenditure for fixed assets like machinery or large equipment that lasts for longer than one year, this qualifies as a capital expenditure.
Businesses record capital expenditures on their balance sheets. The company's profit and loss statement will show all revenue and revenue expenditures and a net income level that does not show the additional amount of money that has gone into capital expenditures. An asset purchased with a capital expenditure is recorded or capitalized on the company's balance sheet and will have depreciation charged against it periodically over time until the value depreciates to zero or the company sells the asset.
Businesses attempt to keep costs as low as possible without sacrificing revenue. This comes with accurate recording and controlling of income and expenditures. Since most companies require materials for products, employees and office equipment, among other things, they need to spend enough money to cover the important things that keep the business running and able to generate revenue and profit.