Part of running a business requires owners to keep track of income and expenses on an ongoing basis. In doing so, business owners can respond to profits and losses in a timely manner. When tracking income and expense accounts, differences between assets and revenues become apparent in how a company makes it money versus the capital used to keep the business running.
Business Accounting Practices
Business accounting practices use two primary tracking methods, known as the income statement and the balance sheet. The balance sheet tracks a business’s available assets, which provide the means for business operations to continue. Balance sheets also list existing liabilities, such as loan obligations and taxes due. In terms of the income statement, businesses track ongoing activities, such as revenues or income earned, along with business expenses. Since the balance sheet gives an overall status on the financial condition of a business, accountants transfer information on the income statement over to the balance sheet in order to determine equity holdings at different periods throughout the year.
A business’ asset holdings consist of any resources the company owns. Assets come in the form of money, monies owed to a business and physical items, such as vehicles and building equipment. Business owners determine how much equity exists in a business by subtracting the total liability amount from the total assets amount. In effect, assets play a part in determining a company’s equity holdings and also exist as the equity holdings themselves. Equity represents ownership in terms of the percentage of a business owned free and clear. Ultimately, assets provide the needed resources for continued business operations.
The ways in which a company makes money provides the revenue sources, or income for a business. Revenue sources can exist as sales income, product sales or payments for services rendered. Within an income statement, whatever’s left after subtracting expenses from revenues equals the net income or net loss for a business. Net income occurs when revenue amounts exceed expenses while net losses occur when expenses exceed revenue amounts. When transferred to a balance sheet, the net earnings amount affects equity holdings for the good or for the bad, depending on whether a net gain or net loss exists. Income statements record revenues and expenses for a certain periods of time, such as on a quarterly or yearly basis. In effect, businesses track revenues on a recurring basis and track asset holdings at specific points in time.
Income vs. Equity
Differences between assets and revenues show up as income versus equity within the accounting process. A company’s revenue streams provide the income that helps build and maintain a business. When compared to a company’s assets, revenues rather add to any existing assets and ultimately increase or decrease equity holdings. Income statements that show a net income help to increase a business owner’s claim on the assets he has. Statements that show a net loss have the opposite effect, meaning a decrease in the owner’s claim on existing assets.