Income is the bottom line; the one thing business owners want to see. Revenue is great but at the end of the day, income means a business is doing something right.
We’re going to look at what exactly is income, where to find it, how to account for it and how it is different than revenue. Let’s start things off with the definition of income.
What is Income in Accounting? (Accounting Income Definition)
Accounting income is the profits generated from sales revenue after all expenses have been paid.
You are going to see revenue at the top of an income statement and income at the bottom. Between top-line revenue and bottom-line income, are expenses.
Why is Income Important in Accounting?
Income is a measure of how much a business makes after expenses. By looking at an income statement, you can determine if a business is profitable or not.
While some businesses may be unprofitable during their start-up years, you don’t want a business that is unprofitable forever. If that is the case, they just go out of business.
Being able to track income not only helps show profitability but also is important for making business and financial decisions.
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What Financial Statement Shows Income?
We have hinted about it a bit and you may already know but the income statement shows income. You won’t find income on the balance sheet. The income statement is where you can find profitability over a period of time.
You are going to want to get used to reading income statements if you are an accountant, business owner or investor. Having the financial literacy of an income statement goes back to being able to make competent business decisions.
How to Account for Income? What to Know
Income and gains are credit account balances. What does this mean? It means that when you prepare a T account or enter income or a gain into an accounting software, it should have a normal credit balance.
If we take a step back you would have known that revenue accounts normally credit balances like sales, rent revenue and dividend revenue. Once you subtract expenses, it will leave you with income, hence income is still a credit balance.
Is Income Different Than Revenue?
It’s important not to confuse income with revenue. They may seem similar but they are completely different. Revenue is monies generated before any expenses are deducted. Income is the number after expenses.
This is the key reason the statement is called an income statement and not a revenue statement. The income statement is to take you from top-line revenue to bottom-line income. Let’s touch on reading an income statement.
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How to Read an Income Statement
When you read an income statement, the first thing to take notice of is the period it covers. From there, have a look at the top-line revenue. Where are the sales coming from? Is it from the business’s main line of work or product?
After that, have a look at all the expenses. What is generating the most expenses in the business? Is it the cost of goods sold? Maybe it is labor in the form of salaries or wages.
Finally, near the bottom, you should see income. This is important to see if the business is really profitable or not. Are they making money or having a loss? You can’t run a business at a loss. If they are profitable, have a look to see how profitable they are.
Recapping Income in Accounting
We realize covering income in accounting that fast may need a recap. Here are the key points to remember:
- Income is the profits generated from sales after all expenses have been deducted.
- You will find income on the bottom of the income statement.
- Income and revenue are not the same things. Income after expenses and revenue is before expenses.
Final Thoughts on Income in Accounting
If you want to generate or account for income in business then you need to understand what it is first. You should be in a good spot now where you see that if you generate more revenue and fewer expenses, your income will increase.
Focus on your sales and costs and you’ll be able to drive a business to profitability!
