What is the difference between income, revenue and profit and its relevance on the accounting equation?
Income is the amount of money earned by a company from its primary business activities. Revenue is the total amount of money earned by a company from all its business activities, including sales, services, and other sources of income. Profit, on the other hand, is the amount of money left over after all the expenses of a company have been deducted from its revenue or income. It is the financial gain that a company makes over and above its expenses.
The relevance of these terms to the accounting equation is as follows: Income and revenue are recorded on the credit side of the equation, while profit is recorded on the equity side. The accounting equation is a fundamental principle of accounting, which states that assets must always equal liabilities plus equity. Therefore, any increase in revenue or income will increase the company's assets, while any increase in profit will increase the company's equity. Understanding these concepts is crucial for accurate financial reporting and making informed business decisions.