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Common questions regarding accounting

What is the difference between income and profit?

Revenue refers to all the money any business entity receives from its customers, for selling its goods or services.

After deducting all the expenses and taxes, what is left is called profit.

Income is used at various places, and it does not have a very specific or explicit meaning. It is more of a general term. Like profit can be referred as ‘Net Income’, revenue can be referred as ‘Gross Income’. There are other terms like ‘Net operating income’. In every circumstance certain expenses are reduced and the net figure is referred.

Revenue and Profit are very clear terms but Income is used invariably at various places and it’s meaning is clarified by its use only.

Another interesting thing, above discussion about use of term income is related to business, I mean in case of individuals, whole salary received is usually referred as Income!!

So when income term is used, if nothing mentioned then it generally refers to Net income i.e. Profit. But be cautious whenever this is used.

What is revenue expenditure?

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

What are gross sales?

Gross sales are the grand total of all sale transactions reported in a period, without any deductions included within the figure. Net sales are defined as gross sales minus the following three deductions: Sales allowances. A reduction in the price paid by a customer, due to minor product defects.

What are net sales?

Net sales are the amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company’s financial statements is a net sales number, reflecting these deductions.

What are the required financial statements?

GAAP requires the following four financial statements: Balance Sheet – statement of financial position at a given point in time. Income Statement – revenues minus expenses for a given time period ending at a specified date. Statement of Owner’s Equity – also known as Statement of Retained Earnings or Equity Statement.

Which financial statement tells the value of a business?

A “net worth” statement or “balance sheet” is designed to provide you with a picture of the financial soundness of your business at a specific point in time. Net worth statements are often prepared at the beginning and ending of the accounting period (i.e. January 1), but can be done at any time.

The statement records the assets of the business and their value, and the liabilities or financial claims against the business (i.e. debts). The amount by which the value of the assets exceed the liabilities is the net worth (equity) of the business. The net worth reflects the amount of ownership of the business by the owners.

The formula for computing net worth is
Assets – Liabilities = Net Worth

Likewise, the following formula helps explain the interaction of the elements of the statement.

Assets = Liabilities + Net Worth

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