Solution 3.2

Distinguish between revenues and expenses using examples to illustrate your answer?

Revenue is the income generated by the business from the sale of its product or service. It is important to note that revenues include both cash and credit sales. Thus a sale is recorded even if the monies are not yet received. This is based on the realisation concept (see below) which states that a transaction is recorded when the purchaser incurs liability for the goods even though no cash may have changed hands. Revenues do not include any monies received by means of loans or cash received from selling fixed assets. These are transactions that affect the statement of financial position. Revenues are income earned (not necessarily received) from the sales of the products or services provided by the business.

Expenses are the costs incurred in running then business on a day to day basis and do not include the purchase of fixed assets or the repayment of any loans. Expenses are the cost of using the resources available to a business (people and fixed assets) to produce a product or service and sell it. Examples include purchases of inventory, wages for personnel, fuel to power assets (motor vehicles equipment), repairs to fixed assets, light and heat, insurance, advertising, rent , rates, telephone and internet costs, accounting fees and general expenses.