There are only three ways that money can flow into a business:
- Capital from the Owner
- Loans from Borrowers
- Income from Sales, etc.
There are only three ways that money can flow out of a business:
- Paying back the Owner or Loans
- Buying Assets like Equipment or Stock
- Operating Expenses
Income and Expenses
Sometimes it is difficult to figure if something is an income or not. The same goes for expenses.
All INFLOWS of money are NOT income. Some inflows have to be given back and some not. If we have to give the money back, then it is not income.
Capital from the Owner as well as Loans from a borrower are inflows of money, but NOT income - since we have to pay it back.
In contrast, money inflow earned from sales IS an income since it was earned.
Likewise, All OUTFLOWS of money are NOT necessarily expenses. Some of this money we can get back and some not. If we can get the money back it is not an expense. If we are giving the money back it also is NOT an expense.
If we buy stock it is not an expense, since we can always sell it and get the money back again. But if we paid courier, telephone and salaries, we can't get the money back and these are expenses.
Money paid back on loans has two parts. The Capital (principle) amount is just giving back what we borrowed in the first place (and not an expsense), but the Interest part is an expense. Interest can be seen as the "cost of" or "rental for" the money borrowed. We can't get it back.
