What is the difference between income, revenue, and gain? These accounting terms are usually presented and seen in the income statement. They may have similarities, but they are actually different from each other. Financial statements preparers, accountants, and other accounting professionals should learn how to distinguish the three to better reflect and present these elements in the financial statements. Furthermore, business owners, entrepreneurs, investors, managers and other business people should also learn how to distinguish those three to make better financial and economic judgments.
To understand the differences among income, revenue, and gain, we go to their definitions as defined by the IASB (International Accounting Standards Board) in the IFRS (International Financial Reporting Standards) Framework and IAS (International Accounting Standards).
Income – represents increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. [F 4.25(a)].
Revenue – represents the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7]
Gains – represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IFRS Framework. [F 4.29 and F 4.30]
Based on the definitions above, we can say that income covers both revenue and gains. This means that both revenues and gains can be considered as income or part of the income. In other words, income is a generic term, which can be a revenue, a gain, or both.
Between revenue and gain, the difference is that revenue always arises in the course of the business’ ordinary activities (e.g., sales of goods or sales of services), while gain represents other items that are considered as income which may or may not arise in the ordinary activities of the business or entity (e.g., gain from sale of an old property or gain from the sale of investments).
Did you already understand the difference between income and revenue from the explanations above? How about the difference between revenues and gains? To further illustrate their differences, let us say that you are into the business of selling computers and you have provided the following within the year or the accounting period:
Sales of computers = $200,000
Costs of computers sold = $120,000
Income from operations = $80,000
Tax and other expenses = $40,000
Gain from sale of company’s service vehicle = $10,000
Net income = $50,000
In the examples above, the “total income” equals $210,000 which is composed of the revenue and gains. Revenue or Sale of computers ($200,000) + Gain from sale of service vehicle ($10,000) = $210,000
Income can be expressed as income from operations or gross income…
Sales of computers ($200,000) – Costs of computers sold ($120,000) = $80,000
Income can also be expressed as net income ($50,000) or the excess of total income over the total expenses. Take note that when total expenses exceed total income, the difference is called net loss.
Revenue is simply the gross sales from the sales of computers amounting to $200,000. Remember that the ordinary course of business in our example is selling computers. In this case, the company’s inventories consist of computers.
Gain, which is also part of the total income, amounts to $10,000 – the gain from selling the company’s service vehicle. We have assumed that the $10,000 is the excess of the property’s selling price over its net carrying or net book value. Take note that the sale of the company’s vehicle doesn’t constitute ordinary business operation or transaction because the company is on the business of selling computers, and not vehicles.
Accounting has the sense of an art and is conventional. It can evolve or it can be further amended and improved by an authoritative body – for example the IASB. And in the case of clarifying the meanings and differences of accounting terms, we have to go to the fundamental framework or to the accepted accounting standards. Though accounting can be considered as an art, we don’t interpret its terms on our own, but we interpret them based on generally accepted principles.
I hope you have learned something on this discussion.
Source: International Accounting Standards (IAS) / International Financial Reporting Standards (IFRS)