Income and expense

Income XE "income:definition" and expense XE "expense:definition" are simple enough. Income is money coming in, and expense is money going out, right? Wrong! "Income" and "expense" as used in accounting, are not that simple. ("Income," as used here, is properly called revenue, but "income" is commonly used.)

Money coming in is cash received, and money going out is cash disbursed.

So the business is a landscape maintenance service, and does some gardening work. The property owner pays $50 cash. This adds directly into the "cash" asset on the left side of the balance sheet. Just for illustration, we will "close the books" after this one revenue transaction. Cash is up $50, and owners equity is up $50. This difference is income. Income is closer to an ownership of cash (or other assets) received. A more descriptive term for income would be "On-the-way-to-add-to-equity." Of course, the term "income" sticks, but in double entry accounting, it refers to owner's equity coming in.

In the course of this job, the gardener spent $20 for fuel and disposal of the garden trimmings. The cash disbursement takes away from the assets on the left side. The expense is the other side of the double entry, and could be called "taking-away-from-equity." Again, the expense is related to the equity area of the balance sheet.