What is income?

What is income?

Income refers to the sum of money earned by the business during an accounting period usually through the sale of goods & services, commonly known as revenue, or by earning through capital investment etc. In case of individual, income is earned in the form of salary or wages.

Explanation – Income:

Income is the money earned on sale of goods & rendering of service in the usual course of business and also the inflow of cash from the use of enterprise resources like interest earned on fixed deposits, dividends earned, royalties earned etc.

In various industries income is earned in different ways such as in the industry which sells products generate major income/revenue from sale of such product. In the firm which provides legal services generates income from the services related to legal advice and in agency business main income is generated in the form of commission.

For example:  There is a toy company named XYZ incorporation that manufacture and sell toys. In the accounting period 2019-2020, cash sales & credit sales were amounted to $2000 & $5000 respectively. The company made fixed deposit of $500 on which the interest earned in accounting year 2019-20 was $20. Also the company has invested in the shares of AB Company on which the XYZ incorporation received dividend of $10.

Therefore, the total income earned is as follows:

Particulars$
Cash Sales2000
Credit Sales5000
Interest Income20
Dividend income10
Total Income7030

Features of Income:

  1. It is the inflow of cash from the exchange of goods & services of from the other activities that can result in the receipt of cash in the business.
  2. It is recorded in the profit and loss statement of the business.
  3. The objective of every business is to maximize their income so that they can generate higher earnings.
  4. In the accrual basis of accounting income is recorded in the books of accounts of business when it is earned and not the payment is received against such income. For example Mr. X sold goods on 5th March, 2020 to Mr. Y on credit. The payment against such sale is received on 15th April, 2020. But income will be recorded in the Financial year 2019-20 only i.e. at the time of sale and not when the payment is received against such sale.
  5. Income generated from the main business of the company is reported in the trading account of the business whereas the income generated from other resources like interest on F.D, Interest on income tax etc. are shown is profit & loss account of the business.
  6. In the books of accounts of the business, income is credited when it is increased whereas debited when it is decreased.

Final thought:

Thus, Income is the inflow of cash or cash equivalents in the business from the different sources but the major incomes of the business are generated from the main business activity of the business. Every business starts with the motive of earning profit where the profits of the company are calculated by deducting all the expenses from the income of the business.

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Related Articles:

  1. Basic Accounting Terms
  2. What are Assets?
  3. What are Liabilities?
  4. What are Expenses
  5. What is Owner’s Capital?

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