Businesses run their operations to produce profit and thus increase their financial holdings. Businesses produce revenues through running their operations but must incur expenses both to acquire the products that they sell to their customers and to run those same operations needed to turn product into actual revenue. Running their operations is not the only method through which businesses can increase their financial holdings, though it is the dominant method. Financial increases secured through peripheral activities unrelated to the business’s main operations are called gains.
Most businesses possess one single main operation that is the sole source of their revenues. For example, a small business that sells hot dogs to students has that single operation and source of revenue and nothing else. Other businesses possess multiple revenue-producing operations. For example, one single business might sell hot dogs through multiple stands while another bigger business might run unrelated operations selling different products to different customers.
Revenues are the sums that businesses earn through selling their products to their customers in the course of running their operations, whether those products are goods or services. Most businesses possess one single source of revenue, that source being the sales revenue from running their main operations. Revenue can usually be calculated as the number of products sold multiplied by the price at which they were sold minus any relevant deductions from those sales such as discounts and returns.
Gains are increases in the business’s financial holdings resulting from peripheral activities unrelated to its main operations. For example, gain on the disposal of an asset is the increase that a business experiences when it manages to sell a useless asset for more value that what it had previously estimated. Examples of other gains can include lawsuit settlements in the business’s favor and potential gains made on the sale of financial instruments held by the business.
Net and Comprehensive Income
Net income is the change in the business’s financial holdings produced through it running its operations for one specific time period and is a measure of the business’s profitability. It can be calculated as being equal to the sum of revenues minus the sum of expenses spent to earn those revenues. Gain and losses are not included in the calculation of net income but they are included along with revenues and expenses in the calculation of comprehensive income.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.