IN THIS LESSON

Money comes into a business as Income and goes out as Expenses.

This lesson describes the different ways that money flows through a business.

Lesson Overview 

In this lesson, you will:

Differentiate between income and expenses

Identify reasons for money flowing through a business

Money Flowing Through a Business 

When you think about it, there are really only a few different ways that money flows through a business. There is money coming in, referred to as income, and money going out, referred to as expenses. Money may flow into a business as cash sales, credit card sales, or other methods. Money may go out of a business when inventory is purchased, bills are paid, etc.

Let’s review each of these scenarios.

Income vs. Expenses 

Income

Income refers to money received for work or through investments. Money can come into your business in several ways.

Some examples include selling products or services, receiving money from the proceeds of a loan, or receiving money from a new investor or current owner.

In certain instances, you may decide to offer credit to your customers. Basically, this means that the customer receives your product or service now but agrees to pay you at a later date.

Why would you do such a thing? One reason is simple: giving your customer flexibility in making payments can increase the sale of your products and services.

Certain kinds of customers, such as businesses usually request such payment terms to help them balance the flow of money coming into and going out of their businesses.

Expenses 

Expenses are the costs that occur as part of a business’ operating activities.

Some examples of money exiting a business include purchasing assets such as equipment or inventory, paying expenses incurred from being in business, making payments to satisfy a loan or liability, or distributing some of the business earnings to the owners.

In certain instances, you might be able to purchase merchandise from your supplier on account, also called on credit. This means that you would receive the product or service now, but agree to pay at a later date.

Buying and receiving products or services which are to be paid at a later date is called accounts payable. Such accounts represent money you owe to someone else.