This will always be the case. The firm could borrow more money from the bank, or issue extra capital to its owners, but these transactions are not the essence of every day business. Firms sell products or services to customers, and incur costs in the process of doing so. We measure these items in aggregate over a period of time to describe the factors that caused our balance sheet to change. Let us now consider the accounts we must keep to help us calculate our profit.
Revenues Are inflows or other enhancements, or savings of outflows.
When we sell goods or services the amount paid or owing to us represents a revenue. It is not necessary for cash to have changed hands for a revenue to be recognised. Expenses Are consumptions or losses of service potential or future economic benefits, The cost of any goods that we have sold is an expense. Monies paid or owing on our phone bill, rent or electricity bill are also expenses. The later formulation will be particularly useful next week, when we introduce the use of debits and credits.