Income

From CaseyPedia

According to Black's Law Dictionary, 8th Ed., income is "[t]he money or other form of payment that one receives, usu. periodically, from employment, business, investments, royalties, gifts, and the like."

One distinction that often escapes new businesspeople is the difference between gross income and net income.

Gross income typically describes total payments received before expenses and other costs of doing business are deducted. A naiive businessperson or investor might assume that a business which brings in $1000/week is thereby capable of providing $1000 worth of value to its owner/operator/investors.

Net income describes the funds remaining after deducting the costs and expenses which were incurred in generating the gross income. One unpleasant surprise is that it is perfectly possible for an operating business to experience negative net income if spending exceeds earning.

When considering income, it is also necessary to discuss the related concepts of timing and recognition. A business may spend money receive a payment in one accounting period (perhaps a week, if the business is reporting to its owners/investors on a weekly basis) but incur an obligation to provide goods or services for a period which extends beyond that reporting period. A business which tells its investors that it received $100 in income in a given week, where it has promised to continue to deliver services for 3 weeks following the reporting week, is likely to present its owners/investors with a misleading view of the health of the business.

A more balanced approach would - if $100 were received for services to be delivered over four weeks - recognize $25 income per week, as the income was earned, rather than showing one week with $100 of income followed by three weeks of $0 income.