One of the most common questions in regards to accounting is whether income is considered an asset or a liability. Although assets can produce income, they are not exactly the same thing.
In this article, we will go over some of the most common questions regarding assets and income.
What is income?
Income is the portion of revenue that a company generates that counts as profit. For companies, this is one of the most important metrics because it shows how well the company is doing. For investors, income remains the most important metric to assess a company’s valuation and stock price.
Individuals can earn income through their labor or by investing in income-generating assets.
What are assets?
Assets are any possessions both tangible and intangible that a company or an individual owns. This may include cars, houses, patents, or even trademarks.
Assets are a key component to generating income, and without them, individuals are only able to generate income through their labor.
Assets are divided into current assets and non-current assets:
Current assets represent assets that the company owns that will convert into cash over the next 12 months. Conversely, non-current assets are only expected to be converted in over a year.
What's the difference between assets and income?
Assets are valuable possessions that a company or individual owns, while income is the profit generated by those same assets. Income is a recurring influx of capital to the company or individual, while assets represent capital that is owned either by individuals or companies.
Here are the key differences between income and assets:
- Income is generated periodically, while assets are already owned
- Income is reported on the income statement of the company
- Assets are reported on the balance sheet of the company
- Assets’ value may appreciate over time
- Income may depreciate in value due to inflation
- Income has liquidity and it can be readily used
- Assets need to be converted into cash to transact with, making them illiquid
Is income an asset or liability?
Income is not an asset or a liability per se, but instead, it is the revenue generated either by labor or assets. To some extent, income can be considered a liability. For example, if you are working in a company and receiving income from that activity, your salary is a liability for the company.
Since it counts as an expense of the company. However, the income itself is not an asset, but it is common for certain assets to produce income.
Where does income appear on financial statements?
Income appears on the income statement of any company. The income statement for a certain period of time will point out the revenues of the company, as well as its cost of goods sold, and its profit margins. The income represents the profit the company was able to generate during that time period.
As we mentioned, a company’s income remains one of the most decisive factors for its market valuation, and attracting investors. The stock market is completely driven by the income of companies, or their potential to earn additional income.
Does income count as assets?
No, income is not considered an asset. However, it is important to understand the relationship between assets and income. Any company or individual requires assets in order to generate income, with the exception of labor, but we can even consider yourself as an asset.
What are considered assets?
Assets are all of the possessions of a company or individual that have a monetary value. Here are some of the most common assets a company or an individual can own:
- Company’s inventory
- Car and vehicles
- Real estate
- Trademarks, or patents (intangible assets)
What is an income in accounting?
Income in accounting represents the profit generated by a company in a certain period of time. It is present on the income statement of the company and it represents the difference between the revenues and the expenses of the company during that period of time.
It is important to understand the key differences between what is considered an asset and what is considered income. Although they are both different from each other, they are extremely related and share a direct relationship.