Income vs. Gain

What is Income and What is Gain?

Income generally refers to the inflow of economic resources in business for providing goods or services or through investing capital. It is usually the price consideration received for suppling goods or rendering services. For example, it is referred as

• sales revenue by a manufacturing or trading entity,
• revenue from fees collected by professional firms,
• commission income by intermediary service providers,
• interest income received from investments by financial institutions etc.

Gain, on the other hand, refers to the profit made from transactions that are not part of the core business operations of the reporting entity. For example, the profit to the manufacturing business from selling a fixed asset like piece of machinery, equipment, or a property. To elaborate further, say, you are in FMCG business and the business sells an old delivery van in the reporting period at a higher price than its book value, then the profit from that sale is considered a gain.

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How both are different?

The primary difference between income and gain lies in their sources. Income is derived from regular business operations, while gain comes from once-off transactions outside the usual business operation. Income is often more predictable, recurring, and steadier, whereas gains can be irregular and variable mostly from unusual transactions.

The shareholders and other stakeholders of the entity may be more interested to look into the details of Income from usual activities of the business operation because a steady source of regular income from revenue can be replied upon future projections, it will help in assessing performance of core business, long-term value creation and cash generation.

For example, a technology company like Apple. The core income generated from the sale of iPhones, MacBooks, and services like the App Store is crucial for stakeholders to assess the company's operational efficiency and market position. Although an one-time gain from selling an old factory would be beneficial, but it does not provide insight into the company's day-to-day business performance.

Let us discuss on their Accounting Treatment.

From accounting standpoint, the term income encompasses both revenue and gains. Revenue arises from the ordinary activities of an entity, while gains represent other increases in economic benefits that meet the definition of income but may or may not arise from ordinary activities.

• Income: Regular income is recognized in the income statement as it is earned. It is typically categorized under operating revenue.
• Gain: Gains are also recognized in the income statement but are usually reported separately from regular income to provide clarity on their non-operational nature.

The accounting and reporting requirement of both Income & Gain affects KPIs getting reported as business. For example, in the case of a manufacturing company like General Electric, consistent income from regular operations is a key factor for valuing the company and assessing its potential for long-term growth. Gains from selling obsolete equipment might improve short-term financial metrics (if remain unadjusted) but are not indicative of sustainable growth.

How does it impact Cash Flow?

Income from regular operations generally has a direct impact on the operating cash flow of a business. It indicates the cash generated from the core business operation, which is crucial for assessing the company's ability to sustain its operations and grow.

Gains, on the other hand, impact the investing cash flow. Since gains often arise from the sale of assets or investments, they reflect the cash inflows or outflows related to these transactions. While they can boost cash reserves in the short term, they are not a reliable source of cash flow for long-term sustainability.

Investors in a retail company, for example, shareholders of Walmart, may be primarily interested in the regular income generated from everyday sales of products. This steady stream of revenue would predictable and long term cash generation for regular dividend distribution by the company. Gains from the once-off sale of assets (like real estate, vehicles, or equipment etc.) are less predictable and cannot be relied upon to sustain operations, regular cash inflow or consistent dividend payouts.

How the treatment of both differs from taxation standpoint?

As we discussed above, in accounting both the terms?income?and?gains?are distinct concepts when will look into the details of the nature transaction and its impact in financials. Now, if you investigate their treatment for tax purposes, that also differs.

Incomes are earnings from the primary operations of a business. Hence, incomes are typically subject to regular income tax. For businesses, this is calculated based on net taxable income, which is total revenue minus allowable expenses as per the tax jurisdiction.

Gains are the profits from secondary or non-operational one-off activities. From taxation standpoint, gains are often subject to capital gains tax, which can differ from regular income tax rates. The tax treatment can vary depending on whether the gain is short-term or long-term.

For example, if a software company earns a revenue of $1mln from selling software products and services then on this regular income the company will pay corporate income tax after deducting tax deductible expenses like salaries, rent, and utilities etc. On the other hand, when the same software company selling an old office building for $1mln having a book value is $0.7mln. Then the company records a gain of $0.3mln ($1mln - $0.7mln) which would be subject to capital gains tax (long term or short term), which could be at a different rate than the corporate income tax. There could be impact in deferred tax treatment because the software company may be having different method of depreciation accounting in both group books and tax books. This may result into temporary differences and impact on deferred tax accounting.