Assets Vs. Income: Definition And Differences (With Types)
By Indeed Editorial Team
Published 13 July 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
If you have an interest in working in the finance or accounting field, it might be helpful to know common terms, such as assets and income. These are key parts of the financial statements because it helps a company make strategic business decisions and promote its financial health. Understanding the differences between assets and income can help you determine a company's value. In this article, we define assets vs. income, explore their differences, provide types of assets and income and highlight the difference between assets and revenue.
Defining Assets Vs. Income
Before comparing assets vs. income, it is important to review the definitions of the two terms:
What is an asset?
Assets are resources owned by a company and have some economic and monetary value. A company's assets can include equipment, physical property, investments, intellectual property and raw materials. Usually, companies have both tangible and intangible assets. Tangible assets are physical and intangible assets that do not exist in physical form and include patents, goodwill, prepaid expenses and account receivables. Companies list their assets on a balance sheet. For companies, assets are important because it helps a company sustain long-term growth. Assets continue to receive benefits even after several years of purchase.
What is income?
Income is the money that a company receives through its works or investments. The net income indicates how well a company is performing and determines whether the company is spending its available funds effectively to help in the company's growth. Companies often desire higher income because it helps expand and allows companies to allocate bigger budgets. Also, a company's income defines the amount of money a company can generate after deducting its total expenses. Understanding a company's net income helps you understand the business health and know if business decisions are profitable.
Comparing Assets Vs. Income
Knowing the difference between assets and income can help promote a company's financial health. Here are some key differences between the two terms:
Ownership of finances
One major difference between assets and income is the ownership of finances. Net income is the money a company brings in each time they sell their services or product. An asset is a resource already owned by the company. The company can choose to sell, use, lease or rent the asset to earn extra income.
Usually, a company might benefit from the assets until the end of the asset's useful life, while they might experience the income benefits for a shorter time. For instance, if a company purchases an office complex worth ₹10,00,000, they can use this asset for many years and sell it for an additional income stream. If the company earns ₹5,00,000 in income due to sales of goods, they might use this money to pay the company's costs like administrative costs, employee hiring costs and utility bills.
Ease of liquidity
When you earn an income from selling your services or goods, you can spend it when and where you want, without waiting. The same is not true for assets except for cash. A company might sell and convert them into cash before spending the money they generate. For instance, a company might sell its property before spending that money. Selling assets might take two months, six months, one year or even more.
Effect on valuation
Often, when valuing a business, an investor might use an income-based approach. Some investors might use an asset-based approach to determine the company's equity. If a company generates higher income or if they have more assets, an investor is likely to make a significant investment in the company.
Often, companies have different procedures for reporting income and assets. A company lists their assets at the top of the balance sheet and places assets on the left side of a balance sheet. Companies typically list their total income at the bottom of their income statement.
What Are The Different Types Of Income And Assets?
Here are the different types of assets and income of a company:
Types of assets
Some common types of assets are:
Prepaid expenses are expenses that a company incurs for making payments for goods and services they have not received or used. Though this is an expense, you list it on the asset side of the balance sheet. Companies consider prepaid expenses as an expense because it occurs over a while. Typically, goods and services that incur prepaid expenses provide value for an extended time. For instance, a company might purchase vehicle insurance in March of a calendar year. Even though the company pays the expense upfront, the insurance provides coverage throughout the remaining months of the year.
Companies use accounts receivable (AR) to obtain payments for services and goods. It occurs when a customer purchases a service or product on credit and they pay it at a later date. These account receivables are an asset because the company makes a sale and receives compensation later than the date of the sale.
Equipment and machinery
A company's equipment and machinery are an asset because it is an economic resource that offers economic value to the company. If a company has heavy machinery equipment, it comes under the category of long-term assets. These machinery can offer long-term service, depending upon how well the company maintains it. Usually, a company might sell equipment and machinery and turn the asset into cash.
Goodwill assets are intangible assets associated with the purchase of one company by another. The concept of goodwill is essential when a company acquiring another company is willing to pay a price premium over the fair market value. Typically, goodwill includes a company's good reputation, loyal customer base, brand recognition and brand identity. Goodwill is a valuable asset, but a company cannot calculate its value precisely.
Types of income
Here are the different types of income:
Any money a business earns from the sales of goods and services is the company's income. Usually, a company calculates their net income from sales after deducting its expenses like administrative costs, labour, utility bills and rent. The business's net income is the total amount remaining after deducting the expenses.
A dividend is money that a company shares with its stakeholders and investors. Companies that pay regular dividends are appealing to investors. When investors invest in a company, it helps increase the company's valuation. Some common types of dividends that a company might pay are:
Cash: One of the most common types of dividends is cash, which allows a company to pay a percentage of the company's income directly to the stakeholders.
Stock: This is another type of dividend in which shareholders receive additional shares in the company. Stock dividends increase the company's valuation and indicate a healthy company.
Dividend reinvestment programme (DRIP): When a company offers DRIP, the company provides an opportunity to stakeholders to put the cash they earn back into the company by purchasing more shares of stock.
Differences Between Assets Vs. Revenue
Assets are resources owned by a company and have a monetary value. These assets can include investments, property, equipment, machinery, goodwill and patent. Companies usually categorise and express them on the balance sheet in terms of cash value. Revenue is the total sum of sales of services and products that customers purchases. It is usually the top line of the income statement.
Revenue accounts for the total amount of money a company earns before reducing its expenses. The higher revenue a company earns, the more it can earn a profit. Though revenue and income might sound the same, income defines a company's profit or money after deducting the total expenses.
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