Accounting Basics – Income and Expenses

Table of Contents

Income

Sales, also known as revenues, represents all income from sales of the company’s products and/or services.

Gross sales: Gross sales is the sum of all sales revenue before any deductions.
Net sales: Net sales represents gross sales less any sales returns, discounts, or other reductions.
- Returns: Any items previously sold to customers that the customers return for refunds must be deducted from gross sales to arrive at net sales.
- Trade and cash discounts: Trade discounts are often granted to customers for a variety of reasons, such as to induce sales. Cash discounts are granted to customers who agree to enter into certain payment arrangements that are beneficial to the seller, such as early payment or automatic payment deductions. These discounts must be deducted from gross sales to arrive at net sales.
Other income: In addition to traditional revenues, income also includes certain “other income” items. These items represent amounts that increase the company’s net income but that are not directly related to the company’s primary line of business. Examples include interest income on excess cash, gains on asset sales, and other nonrecurring or unusual items.

Cost of goods sold (a.k.a. cost of sales): Cost of goods sold represents the amount of direct costs associated with a company’s sales for the period. It is the residual difference between a company’s inventory available for sale during the year and its inventory remaining at the end of the year.
Operating expenses: Operating expenses, often referred to as selling, general, and administrative expenses (SG&A), are those overhead and administrative costs that are incurred in supporting the company’s operations but that are not directly incurred in production of the company’s goods for sale.
Other expenses: These items represent amounts that decrease the company’s net income but that are not directly related to the company’s primary line of business. Examples include interest expense, losses on asset sales, and other nonrecurring or unusual items.