Financial Accounting

Elements of Financial Statements part 4 – Income

As per IASB (2020), “Income is increase in economic benefits (Cash) during the accounting period in the form of inflows or enhancements of assets (Cash) or decreases of liabilities that result in increases in equity (discount received, profit increases equity), other than those relating to contributions from equity participants (share issue).” (IASB, 2020)

All businesses exist to maximise profits which is calculated as Income minus expenses. To achieve this objective, businesses need to either increase their income or reduce expenses on a continuous basis. Hence the primary function of all profit-making businesses can be considered as revenue generation and growth. This could be achieved by selling products or services. Incomes generated as a result of the main function or operation of the business are called Sales/ Revenues or Turnover (different terminologies for the same concept. A business might have 100s of main operations or products like Procter & Gamble or Tesco and sales receipts of all products would be considered as “Sales”. However, there could be an incidental income as well which would not fall under sales. For example, if a business receives interest on its cash in the bank or if it rents out part of its building (provided renting is not primary function or product of the business) and receives rent, these monies received will be considered as “other Income” rather than Sales. Another very common and modern reason for other income is when companies invest in other companies and receives dividend from those companies. 

This article is written by Raja Mizan who is a senior lecturer in accounting & finance in a UK university. He is an ACCA member and also runs his own accountancy practice RMR Accountants & Business Advisors.

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