It is common in today’s business environment to find different discussions about the importance of the concepts of revenues, receipts and their relationship to profit and loss. At the same time, it is essential to work rigorously with these terms. The determination in the treatment of these terms will enable us to study fundamental aspects of business results properly.
One of the main issues is to clarify the fundamental difference between revenue and collection on the one hand and between expense and payment on the other. There can be income, e.g. a sale, without collection, and expenditure, e.g. a purchase, without payment at the same time as the purchase is made. Another example would be the receipt of a bank credit that implies a collection of money lent to us, but in no way is this considered income since, as explained above, the company’s income comes from the company’s operations. The difference between receipts and payments is on which side of the cash account it is recorded. The difference between revenues and expenses is profit, a different economic concept from the financial idea of cash.
In accounting, profit is defined as the excess of equity at the end of a period over that at the beginning.
The above convergence with the definition of the profit and loss account is due to the achievement of profit in a given period. The data provided by the profit and loss account refers to the concept of profit or loss concerning a period, which can be a month, a quarter, a half-year or even a day. The most illustrative is usually the one for an entire year, but this depends to a large extent on the type of business in question.
It is important to note that, to establish the income and expenses that make up the profit and loss account, the following accounting events usually occur:
- Receipt of resources through sales.
- Consumption of resources in the sales themselves.
- Consumption of resources in complementary activities.
The reflection of profits, income and expenses that give rise to collections and payments is established in a specific way in the configuration of the profit and loss account, which is the accounting document that best reflects the good or bad management of the company by those responsible for it. It provides essential data such as the profit if there is one, how much it amounts to, or what percentage it represents of total sales.