At each Fiscal Year or Accounting Period, the company calculates its operation results. However, the company should preferably calculate success (profit) or failure (loss) in shorter periods: months, quarters, four-month periods, etc.
The result may be:
- Positive: Profit or Surplus
- Negative: Loss or Deficit
The Fiscal Year income is the difference between the Revenues and Expenses.
Revenues - Expenses = Income |
If:
- Revenues > Expenses = Profit
- Expenses > Revenues = Loss
Revenues usually correspond to the sale of goods or provision of services. They appear in the balance sheet through Cash inflows (Cash Revenues) or inflow as Rights Receivable (Revenue in Installments) - Trade Notes Receivable.
The Revenue increases the Assets, but not every Asset increase means Revenue (Bank Loan, Financing, etc increase the Asset of the company and are not Revenues).
The Expenses are all asset or services consumption to obtain Revenue. It is in the Balance through a Cash reduction (down payment) or through a debt increase - Liabilities (when the Expenses are made in the present to be paid in the future - installments). Expenses may also originate in other reductions of Assets (besides Cash), as in the case of wear and tear of machines, etc.
At the end of Fiscal Year, Accounting confronts Revenues vs. Expenses to calculate Income of the period (profit or loss). The Income increases (in the event of profit) or reduces (in the event of loss) the Net Equity.
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