Understanding income and the difference between a revenue and a gain

What is income?

Income is defined as “increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution from equity participants”.

Simply stated, income is an inflow of future economic benefit that increases equity, other than those that are contributed by owners. It specifically increases retained earnings in the equity section of the balance sheet.

Income is derived from the following activities:

a. Sales of merchandise to customers. This includes all sales to customers during the period. Sales returns, allowances and discounts should be deducted from gross sales to arrive at net sales.

b. Rendering of services. This includes professional fees, tuition fee, advertising commissions, insurance agency commissions, and admission fees for artistic performance.

c. Use of resources. This income includes interest, rents, royalty and dividend income.

d. Disposal of resources other than products. This includes gain on sale of investments, gain on sale of property, plant and equipment and gain on sale of intangible assets.

e. Foreign exchange gains. This represents gains resulted from foreign currency exchange transactions and translations.

Income actually covers both revenue and a gain.

What is the difference between revenue and a gain?

Revenue arises in the course of the ordinary regular activities of an entity. Its examples include sales of merchandise by a merchandising company, lease income by a leasing company, tuition fees by schools and other educational institutions, interest by lending and banking institutions, dividends received by stock holding companies, and professional fee by a professional.

Gains represent other items that are considered as income but do not arise in the course of ordinary regular activities of an entity. Examples are gain from sell of property by a company whose primary operation is not selling of properties, gain from sale of investments by a company whose primary operation is not selling of investments, and gains from foreign currency exchange transactions and translations.

Revenue also refers to gross sales or receipts earned by an entity, while gain represents the excess of selling price or fair value of an asset over its carrying or book value.

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