Income

What is Income?

Income is the total money or earnings that individuals, organizations, or businesses accumulate as a reward for providing services, selling goods, or investments. 

This concept is a key player in financial and economic discussions, representing the monetary gains acquired within a specific period. There are two main types of income:

1. Gross Income: Gross Income represents the total earnings before specific deductions. It's like the full pie, including every slice of revenue from various streams such as wages, pensions, dividends, capital gains, or business profits.
2. Net Income: Net income is what remains after slicing off the expenses from this pie. It's the clear profit or the financial remainder after deducting all costs associated with providing a service or making a sale.
   • In layman's terms, net income is the money left in your pocket after paying all the bills. Gross and net income is the financial fuel that powers personal obligations and business operations.

Calculating Gross Income using Income Statement

Consider a hypothetical situation where you earn a monthly salary of $6,959 as a Financial Analyst. In this scenario, your monthly gross income is calculated as $6,959.

From a mathematical standpoint, this is calculated by subtracting total revenue from sales returns and allowances.

Gross Income = Total Revenue - Sales Returns/Allowances

Here's a step-by-step process to calculate gross income:

1. Obtain the income statement: This statement summarizes a company's revenues and expenses for a specific period.
2. Locate the revenue/sales figure: Search for the specific entry denoting the company's total revenue or sales for the given timeframe, typically identified as "Total Revenue," "Sales Revenue," or "Net Sales."
3. Identify any sales returns or allowances: When the financial statement shows a specific entry for sales returns or allowances, you should deduct this figure from the total revenue or sales amount you calculated earlier. Sales returns and allowances are essentially the money given back or price adjustments provided to customers for products they've returned or that were damaged.
4. Calculate gross income: Subtract the sales returns or allowances (if applicable) obtained in Step 3 from the total revenue/sales figure obtained in Step 2. Doing so will give us the GI. Mathematically, the calculation can be represented as

Gross Income = Total Revenue - Sales Returns/ Allowances

Calculating Net Income using Income Statement

Net Income is what remains after you’ve covered all your outgoings. Here is a quick example to explain this concept. 

Assume that these are your expenses: 

• $2,000 for rent
• $250 for phone services
• $300 for groceries
• $50 for fuel 

In total, your expenses would be $2,600.

The Net Income will be:

Net Income = Revenue - Expenses

Net Income = $6,959 - $2,600

Net Income = $4,359

Your net income for that month was $4,359. 

Here's a step-by-step process to calculate net income:

1. Gather the income statement: This statement should provide information about revenue, expenses, and other relevant items for the desired period.
2. Identify the revenue: Look for the total revenue or sales figures on the statement. This number showcases the overall sum of money earned from sales of goods or services.
3. Determine the expenses: To calculate your expenses accurately, list all the different types of costs. This list might include:
   • Cost of goods sold (COGS)
   • Day-to-day operating expenses
   • Interest payments
   • Taxes
   • Other similar expenses
4. Calculate total expenses: Sum up all the expenses from step 3 to determine the total expenses for the period.
5. Calculate net income: Subtract the total expenses (step 4) from the total revenue (step 2). The result will be the net income income for the period.

Sources of Income

To financially support goals and ambitions, individuals and businesses need to explore multiple economic streams of revenue.

In this section, we will delve into ways individuals can bolster their finances while defining ways businesses can generate revenue for efficient operations and profitability. Let us learn more below.  

Personal Income Streams

In terms of personal finances, there are many ways individuals can navigate to earn money and improve their financial standing. Examples are provided below:

1. Employment: When employed, you get money from salaries, wages, tips, bonuses, and commissions. 
2. Self-employment: When you are a self-starter or an entrepreneur, you get money from your business.
3. Investments: Earnings from financial instruments like stocks, bonds, mutual funds, or real estate.
4. Rental Revenue: Commission from renting out assets like vehicles, equipment, or real estate.
5. Interest Revenue: Money earned from interest payments on bonds, certificates, or savings accounts of deposit (CDs). 
6. Royalties: Money earned through creative or intellectual property. People like artists, musicians, authors, or investors receive this money. 
7. Assistance from Uncle Sam: Various government programs provide financial aid, like social security, unemployment, or disability benefits, aiding individuals during different life circumstances.

Business Revenue Streams

Business Revenue Streams are

1. Sales and Services: At the heart of most businesses is the sale of goods or services. Whether it's a trendy new app, a handcrafted good, or specialized consultancy, sales drive the primary revenue for businesses.
2. Leasing Assets: Companies often own assets they can lease - like office spaces, retail locations, or machinery - creating an additional income source.
3. Advertising Partnerships: Businesses can significantly boost their income by offering advertising space or entering sponsorship deals. This is especially true for businesses with a strong online or media presence.
4. Licensing and Franchising: Licensing assets through franchising agreements like fees or royalties allows businesses to earn money. 
5. Grants and Funding: Grants, donations, and investment funding can greatly financially support ventures at research institutions, non-profit organizations, or startups.  
6. Earning Interest or from Investments: Businesses can also earn through their investments or interest from money they've saved.

A solid fundamental knowledge of these revenue streams can empower individuals and businesses to make informed financial decisions. Doing so can increase individual wealth and business revenue for long-term success. 

Factors affecting income

Understanding the different elements that shape our financial health is key. Both personal factors and business dynamics play a role in this.

At an individual level, various factors play a significant role in determining one's financial prospects. These are:

1. Education: Higher education (e.g., college degrees or professional certifications) provides individuals with specialized skills and knowledge highly valued in the job market.
2. Skills and Expertise: Proficiencies and expertise developed through training, practical experience, and ongoing learning play pivotal roles in shaping one's financial opportunities.
3. Experience: Experienced professionals' deep industry knowledge and extensive networks can lead to increased wealth.
4. Industry and Occupation: Different industries and occupations offer varying salaries. 
5. Geographical Influence: Living in a city or region bustling with industries often translates into better job prospects and higher salaries than in rural or less economically developed areas.
6. Socioeconomic: Socioeconomic background influences wealth, and disadvantaged individuals face barriers to education, skills, and networking, which can limit their financial prospects.

From a business perspective, several factors influence financial success. Some factors are

1. Sales and Costs: The balance between what a business sells and spends directly affects its profits.
2. Competition and Consumer Preferences: Fierce competition can strain pricing and market share, impacting profitability. Evolving consumer preferences may hinder business growth, necessitating adaptation to maintain demand for products or services.
3. Technological Progress: Technological advancements can disrupt industries and impact corporate profitability. Companies that do not stay abreast of technological shifts or adapt to evolving business practices may encounter difficulties in preserving their financial success.
4. Marketing and Branding: Competent marketing and branding approaches can boost customer recognition, attract fresh clientele, and boost sales figures. Allocating resources to marketing initiatives can lead to increased revenue streams.
5. Economy and Rules (Economic Conditions and Regulations): Things like taxes, laws, or the overall economy can affect a business's income. 
6. Unexpected Events: Things like natural disasters or significant world changes can change how much money a business makes.

Taxation and income 

Taxation helps the government fund public services and generate revenue. The taxable amount depends on an individual’s or business’ earnings. The government hopes to decrease the tax burden and create social and economic fairness using this method.

Let's explore these aspects:

1. Progressive Tax Systems: A progressive tax system causes the tax rate to increase as the taxable earnings rise. This system collects taxes more from the “rich” or those with higher revenue streams. 
2. Tax Brackets: Tax brackets are specific income bands to which different tax rates apply. Tax brackets are typically structured so that lower-wage individuals are subject to lower tax rates and vice versa. This tiered approach ensures fair taxation.
3. Deductions: Deductions are expenses or allowances that reduce the taxable income, effectively lowering the amount subject to taxation. They're expenses or allowances that lower the amount of money you're taxed on, which means you end up paying less in taxes overall. Some examples include:
   • Student loan interest
   • Mortgage interest
   • Student loan interest
   • Medical expenses
   • Charitable contributions
4. Credits: In contrast to deductions, tax credits lower the tax liability. Examples of tax credits include:
   • Earned Income Tax Credit
   • Child Tax Credit
   • Education-Related Credits 

Look at the table below for an example of how taxes work using hypothetical tax brackets and rates:

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Accepting Risk
• Baseline
• Cash Credit
• Debenture
• EOQ