What are Income Accounts in accounting?
Reading Time: 3 minutesUnderstanding your income accounts gives insight into your business’s cash flow and financial health.
In this article, we talk about income accounts, what type of information you find on income accounts, examples of income accounts, and the uses of income accounts.
What are income accounts in accounting?
Income accounts or income statement accounts can also be called temporary or nominal accounts. It records your business revenue, expense, profit, and loss transactions within a given period.
You can clearly see your business’s profitability over a given reporting period.
What type of information is on the Income statement accounts?
An income account statement contains a company’s revenue and expenses and tracks all the expenses associated with each transaction.
Big companies may have different income statement accounts to track the revenues and expenses associated with various product lines, departments, and divisions.
Income statement accounts are used to record transactions involving:
- Operating revenues
- Non-operating revenues
- Operating expenses
- Non-operating expenses
- Gains and Losses
Operating revenues
This is the income your business generates from business activities. The primary way of generating revenue is through selling your product or delivering a service.
Operating revenue varies from the industry. For example, an online retailer produces its operating revenue from the sale of merchandise, while a YouTuber generates revenue from content views or ad placement.
Non-operating revenues
These revenues aren’t part of your company’s core business services. They are usually not produced from the company’s primary business activity, nor are they expected regularly.
Non-operating revenue is typically found below operating income and above net income/profit in your financial statement.
Examples of such revenue can be the sale of assets (buildings, vehicles, equipment, etc.), investment income, or income from the settlement of a lawsuit.
Operating expenses (OPEX)
These are costs your company generates that aren’t related to the production of a product. Operating expenses are incurred through normal business operations such as property rentals, maintenance and repairs, utilities, inventory costs, marketing, insurance, and funds allocated for research and development.
Knowing your operating expenses allows you to calculate your company’s operating expense ratio (OER), which helps you compare your expenses to income. With the OER, you can see how your business is fair compared to competitors in your industry.
Non-operating expenses
These are expenses that are not directly related to core business operations. The most common non-operating expenses are debt interest charges, inventory write-offs, and lawsuit settlements.
Having detailed records of your non-operating expenses measured against operating expenses shows a clearer picture of your company’s performance.
Gains and Losses
This is income your business gets from a one-time transaction that is non-repetitive. It’s the positive difference between the acquisition price of a product or service and its current price.
Examples of income from gains are earning money through a legal settlement, selling part of a business, or selling equipment or company property.
Losses occur when expenses exceed revenues from a single transaction or a sum of transactions for an accounting period. Another common type of loss can also mean that the value of your business asset decreases throughout its useful life.
Examples of Income Statement Accounts
There are many income statement accounts a business uses.
Listed are the common ones, which include;
- Net sales (sales or revenue)
- Cost of Goods Sold (COGS)
- Sales Returns and Allowances
- Service Revenues
- Salary Expense
- Selling
- General and administrative expenses
- Wages Expenses
- Pretax income
See 10 ways to avoid paying taxes legally.
- Rent Expense
- Utility Expense
- Advertising Expense
- Automobile Expense
- Depreciation Expense
- Interest Expenses, and many more.
Uses
The income statement accounts provide valuable insight into your business performance and help you make informed decisions that could impact business growth.
As a small business concerned about the longevity of your operations, you should keep an eye on your income accounts.
- On-demand Reports: With accounting software, it’s convenient to track your business cash flow and generate quarterly or monthly reports. These reports can help you and potential investors keep up with the performance of your business and make informed decisions. You can also identify the threats to your business continuity.
- Track your expenses: As small businesses grow, so do expenses, and it becomes easy to lose track of them. The income statement account helps track these expenses and highlights future expenses so as not to catch your business unaware at any time. Expenses incurred by a growing business could be bills, hiring workers, buying supplies, or promoting the business.
- Comparing your company: Information on the income accounts, such as the Operating Expense Ratio (OER), can help compare two or more companies. You can use this to determine how efficiently your company operates compared to similar-sized businesses in different sectors.
- Applying for loans: Income account statements are helpful for loan applications. Creditors or financial institutions usually request to see how much your company earns before giving out loans, as these statements provide reliable information for lenders to analyze.
Final thoughts
As a growing small business, following your income account statements closely is essential.
This way, you can see how much profit or loss your business generates during a reporting period.
The data on an income account becomes even more valuable compared with several reporting periods. Akaunting provides a comprehensive bookkeeping solution for a bird’s eye view of your business.
