Not all businesses deal with products. Many of them simply provide a service.
Examples of this range from labor-intensive work like construction, plumbing and repairs to technology-oriented services like graphic design, call centers, marketing and programming work. Legal services, medical practices and bookkeeping services also come under this category, of course. I'm sure you can think of other examples.
Since service businesses don't have to deal with products and product costs, accounting for them is generally a bit simpler.
George's Catering, the sample business used throughout our lessons, is a service business.
Interest and Investment Income
Another common form of income, though not usually the primary form of income for a business, is interest and/or income from investments.
A business can receive interest based on money they've invested in a savings account. The interest amount is calculated based on an annual interest rate and usually accumulates in the account on a monthly basis.
A business can also invest in another company or financial instrument and earn a return from this.
For businesses that own commercial or residential properties and rent them out to other businesses and individuals, they will receive rental income. This is normally invoiced and received on a monthly basis.
Each one of the income examples above represent some sort of event that occurs (like a sale being made), which results in money flowing into a business.
Income and the Accounting Equation
In our previous lesson on profits and losses, we said that profit belongs to the owner, meaning that more profit means more owner's equity. We also said that profit is calculated by taking income and minusing expenses.
So now, how exactly does income fit into our accounting equation?
Here's the answer:
More income (1) means more profit (2), which means more for the owner (3).
Income thus comes into being (and increases) on the same side as owner's equity – on the right side.
A Detailed Income Example
Okay, let's return to George's Catering and see how George deals with income.
This is what the business looked like after our last transaction:
e) Now George’s Catering provides catering services for a wedding. George gets $10,500 from this job in cash. What happens to our accounting equation?
Well, the simple part is probably the cash, an asset.
Assets increase (on the left), because we have received $10,500 in cash.
The source of that cash is the catering services provided. These services are income, meaning the event that results in money flowing into the business.
The business has made income, and this is worth $10,500.
Income increases on the right (the same side as the owner’s equity) and causes the owner’s equity to increase by $10,500.
The owner now has a stake of $25,000 of the total assets of $30,000.
Once again, the external parties’ stake (liabilities) will be the same as it was before this transaction ($5,000).
So, as you can see, income results in more assets, and in the owner having a greater share in the assets.
Want to see the full journal entry for this transaction?
Well done on completing our lesson on Income Definition and Examples!
In the example we just covered George's Catering was paid immediately in cash for providing the catering services. But in real life, this is not always the case. A lot of the time we only receive the cash much later. In accounting, this is called accrued income, and we have a specific way to deal with this.