What are the differences between financial or accounting income and taxable income?
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Financial vs Taxable Income Show
Income is simply the total revenue for a period of time. From a business point of view, survival of an entity depends on its income or revenue. Income is expressed for a specific period. For example, one may say that my monthly income is $2000, or a company may say we earned $ 1 million during the last six months period. Stating income without time limit doesn’t make any sense. For an entity or organization, there is a legal requirement or legal duty to calculate financial income and taxable income. Financial Income Financial income or accounting income is the income that is published in the financial statements as revenue. Accounting income is calculated on the accrual basis; that means, even the income that is yet not received as money, but if earned during the financial period, is included to the income calculation. Accounting income is the one used to arrive at a profit for the financial period. In accounting income, the period for which income is calculated is mostly known as the financial year. However, there are companies that calculate accounting income for less than a year. The main purpose of calculating financial income is to show the performance of the company to the stakeholders, and hence facilitate them to make a decision regarding their interest towards the company. Taxable Income Taxable income is the income calculated for the purpose of calculating and making payments to the Tax department of the country. This is a mandatory requirement for companies to comply with. Calculation of taxable income may vary from one country to another depending on the tax law of the country. Further, the tax rates and tax regulations are subjected to changes, and generally, amended every year. Tax law provides guidelines to arrive at taxable income. This may include or exclude some items that are not used to calculate accounting income. The taxable income is generally calculated for one year (there are very few exemptions); this time period is known as the tax year. What is the difference between Financial and Taxable Income? As their name denotes, both financial income and taxable income have some distinguishing features. • Accounting income is based on the principle of accounting, whereas taxable income is based on tax law of the country. • Always taxable income is lower than the accounting income. • The time duration used to capture accounting income is known as the financial year, while the time duration for which taxable income is calculated is known as the tax year. • Taxable income is calculated to compute and pay tax, whereas accounting income is calculated to present the performance of the company to the shareholders and stakeholders. • Financial income is published publicly, but taxable income is exchanged only between Tax office and company. Revenue vs. Income: An OverviewRevenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Revenue, also known as gross sales, is often referred to as the "top line" because it sits at the top of the income statement. Income, or net income, is a company's total earnings or profit. When investors and analysts speak of a company's income, they're actually referring to net income or the profit for the company.
Key Takeaways
What Is The Difference Between Revenue And Income?RevenueThe revenue number is the income a company generates before any expenses are taken out. Therefore, when a company has "top-line growth," the company is experiencing an increase in gross sales or revenue. Both revenue and net income are useful in determining the financial strength of a company, but they are not interchangeable. Revenue only indicates how effective a company is at generating sales and revenue and does not take into consideration operating efficiencies which could have a dramatic impact on the bottom line. IncomeNet income is calculated by taking revenues and subtracting the costs of doing business, such as depreciation, interest, taxes, and other expenses. The bottom line, or net income, describes how efficient a company is with its spending and managing its operating costs. Common financial ratios that use data from the income statement include profit margin, operating margin, earnings per share (EPS), price-to-earnings ratio, and return on stockholders' equity. Income is often considered a synonym for revenue since both terms refer to positive cash flow; however, in a financial context, the term income almost always refers to the bottom line or net income since it represents the total amount of earnings remaining after accounting for all expenses and additional income. Net income appears on a company's income statement and is an important measure of the profitability of a company. Revenue vs. Income ExampleApple Inc. (AAPL) posted a top-line revenue number of $365.8 billion for 2021. The company's revenue number represented a 33.3% year-over-year increase. Apple posted $94.7 billion in net income for the same period, which represented a 64.9% increase year-over-year. We can see that Apple's net income is smaller than its total revenue since net income is the result of total revenue minus all of Apple's expenses for the period. The example above shows how different income is from revenue when referring to a company's financials. Bottom line growth and revenue growth can be achieved in various ways. A company like Apple might experience top-line growth due to a new product launch like the new iPhone, a new service, or a new advertising campaign that leads to increased sales. Bottom-line growth might have occurred from the increase in revenues, but also from cutting expenses or finding a cheaper supplier. Can Income Be Higher Than Revenue?In general, income can never be higher than revenue because income is derived from revenue after subtracting all costs. Revenue is the starting point while income is the endpoint. In cases where income is higher than revenue, the business will have received income from an outside source that is not operating income, such as a specific transaction or investment. Is Revenue or Income More Important?While both measures are important and that income is derived from revenue, income is generally considered more important. The reason is that income is profit, which shows that a business is able to cover its expenses and use that profit to grow the business and not rely on outside sources, such as debt, to continue operating. Strong revenues will indicate that a business can sell its product or service but strong profits will indicate a business is in good financial health. What Are the Advantages of Revenue Management?Revenue management allows a company to better manage its sales tactics, its costs, such as the need for raw materials, offer a better price point to customers, run operations more efficiently, and keep inventory slim. What is one difference in the calculation of financial accounting income and tax income?When comparing GAAP and tax-basis statements, one difference relates to terminology used on the income statement: Under GAAP, businesses report revenues, expenses and net income. Tax-basis entities report gross income, deductions and taxable income.
What is the difference between accounting and taxation?While accounting encompasses all of a company's operations, taxation is more about creating strategies to help companies better complete their tax returns. Taxation also concerns individuals who are required to file tax returns annually.
What is the difference between accounting income?Accounting income reveals the net profits generated by a business after all expenses have been accounting for, while gross income only reveals the difference between revenues and the cost of goods sold; gross income does not include the effects of selling, general and administrative expenses.
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