The Accounting Equation and some Cool Terms😎

Income, Revenue, and Gains?

Are these related at all? Do they all mean the same thing? I am sure we have probably used them interchangeably before, maybe it’s acceptable in other disciplines but not accurate when you use them in an accounting environment. Let us try to understand them each;

Revenue

The amount earned from a company's main activities such as selling merchandise or providing services. For example, a company that sells cars gets its revenue from the amount paid by customers when a car is bought. Revenue normally comes from goods purchased. Remember we say purchases usually refer to goods bought for resale. So as far as the asset is meant for resale not use, it is a revenue

Gain

A peripheral activity, such as selling the old delivery car. A Gain is the amount received that is in excess of the asset's carrying amount (book value). A company that sells cars decides to sell one of the cars used by the company itself, let say the Managing Director’s car, this is a Gain because the company does not deal in this kind of sale. The Managing Director’s car was bought with the intention of use by the company and not resale.

Income

Sometimes used instead of the word revenue: some people refer to the rent they receive as rent income. Generally, accountants use the word income to mean "net of revenues and expenses." For example, a retailer's income from operations is sales minus the cost of goods sold minus operating expenses. With the story of our car selling company, their income will be the revenue we talked about minus operating expenses incurred by the company

What the Operating Expenses?

Are they different from normal expense?
They are the cost of a company's main business activities that have been used up during the period.

The Accounting Equation

This is the basis upon which the double entry system is constructed. The equation expressly states that:

Assets = Liabilities + Shareholders' Equity

Assets

An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to floe- IASB’s. Moving away from this definition, assets are simply resources that bring some form of future economic benefits to the businesses that own them. Examples of assets are Factory, Office Building, Warehouse, Office furniture, etc
There are two classifications of Assets;

Non-Current Assets

these are assets from which future economic benefits are expected to flow in more than a year after the reporting year. They have no intention of resale for Non-Current Assets and they earn profit or income from its usage

Current Assets

These are assets from which future economic benefits are expected to flow in not more than a year after the reporting year. There is an intention to turn such assets into cash within one accounting year.

Liabilities

These are obligations of businesses to transfer assets or provide services to other entities as a result of past transactions or events. IASB’s conceptual framework defines liability as a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Examples of Liabilities are amounts owed to a supplier of goods bought on credit and bank overdraft.

Capital or Equity

These are amounts invested in a business by the owner and amounts are the business owes to the owner. This is also a liability, a special kind of liability known as Capital. It is usually in the form of shares for limited liability companies.
According to the IASB, Equity is the residual interest in assets of the business after deducting all its liabilities.