Page 18 - ISCDEBK-XI

Basic Accounting Terms 2.5
(ii) Net Profit. Excess of total revenue over direct and indirect expenses.
Net Profit is the profit earned after allowing for all expenses direct and indirect, in case
expenses are more than the revenue, it is Net Loss.
13. Loss. Excess of expenses over total revenue.

Loss is excess of expenses of a period over revenues for that period. It decreases the owner’s
equity, i.e., capital. It also refers to money or money’s worth lost (or cost incurred) against
which the enterprise receives no benefit, e.g., cash or goods lost in theft, loss on sale of
fixed assets, etc.
14. Expense. Amount spent to purchase and sell goods and/or services.
Expense is the amount spent to purchase and sell goods and/or services. Examples of
expense are payment of salaries, wages, rent, etc.
15. Revenue. Amount received or receivable against sale of goods and/or services.
Revenue is the gross inflow of cash, receivables or other consideration earned by the
enterprise from the sale of goods and/or services in its ordinary course of business. Examples
of revenue are amount received or receivable from sale of goods, rent, commission, etc.
Revenue is the gross inflow of cash, receivables or other consideration arising in the ordinary
activities of an enterprise from the sale of goods, from the rendering of services, and from the use
by others of enterprise resources yielding interest, royalties and dividends.
—Accounting Standard 9 issued by ICAI
16. Income. Excess of total revenue over total expense.

Income is the profit earned during a period of time. It is the difference between revenue
and expense. For example, goods costing ` 15,000 are sold for ` 21,000, the cost of goods
sold, i.e., ` 15,000 is expense, the sale of goods, i.e., ` 21,000 is revenue and the difference,
i.e., ` 6,000 is income. It can, therefore, be expressed as:

Income = Revenue – Expense

Income increases owner’s equity.
17. Drawings. Amount, goods or asset taken by the proprietor for personal use.
It is the amount of goods or asset which the proprietor or a partner withdraws (takes) for
his personal use. Drawings reduces capital of the owners.
18. Capital. Claim of the owners or proprietor.
Capital is the amount which the proprietor has invested in the business, increased by
profit (decreased by loss) and claims from the firm. For the firm, it is a liability towards the
owner. Capital is shown as a liability because for accounting purpose, owner is separate
from the business. Capital is also known as owner’s equity. It is always equal to assets
less liabilities. This can be expressed as:

Capital = Assets – Liabilities