Definition
Income is 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 (IASB Framework).
Explanation
Income is therefore an increase in the net assets of the entity during an accounting period except for such increases caused by the contributions from owners. The first part of the definition is quite easy to understand as income must logically result in an increase in the net assets (equity) of the entity such as by the inflow of cash or other assets. However, net assets of an entity may increase simply by further capital investment by its owners even though such increase in net assets cannot be regarded as income. This is the significance of the latter part of the definition of income.
Types
There are two types of income:
- Sale Revenue: Income earned in the ordinary course of business activities of the entity;
- Gains: Income that does not arise from the core operations of the entity.
For instance, sale revenue of a business whose main aim is to sell biscuits is income generated from selling biscuits. If the business sells one of its factory machines, income from the transaction would be classified as a gain rather than sale revenue.
Examples
Following are common sources of incomes recognized in the financial statements:
- Sale revenue generated from the sale of a commodity.
- Interest received on a bank deposit.
- Dividend earned on entity’s investments.
- Rentals received on property leased by the entity.
- Gain on re-valuation of company assets.