Gains vs Revenue & Losses vs Expenses
In this article, Bijal Gandhi (ESSEC Business School, Master in Management, 2019-2022) explains the difference between gains and revenue, and losses and expenses.
This read is for the students who wish to have a clear and theoretical understanding of the basic terms used in accounting and finance.
We know from revenue, that it is referred to the money brought into a company from the sale of either goods, services, or both. Revenue is synonymous to sales and top line. This is because it first line on the income statement and it is a good indicator of a business’s performance. Revenue consists of two components, the price and the number of products/services sold. It is then calculated in the following manner:
Gains refers to the income generated through non-primary operations of the company. Any positive monetary value (profit) generated from secondary sources is a capital gain. For example, profit from the sale of real estate is to be treated as capital gain. Other such examples include the following,
• Profit from sale of equity holdings in any company
• Profit on investment in mutual fund
• Profit from winning a lawsuit.
• Profit from disposing an asset.
Gains can be from short-term holdings or long-term holdings. Short term could be defined as one to two years depending on accounting standards and type of financial instrument. It is important to take this in consideration while investing as both have different taxation guidelines.
Expenses refers to the cost of operations incurred by a company. The basic goal of any company is to keep the expenses in check to ensure maximum profits. Expenses are broadly defined under the following two categories,
• Operating Expenses: The costs related to the main activities of the company such as cost of goods sold, salary, rent, legal, advertisement, etc.
• Non-Operating Expenses: These are the expenses that are not directly related to the core operations of a business. For example, profit from the sale of real estate would be a non-operating expense for a company who does not regularly deal in real estate. Similarly, the expenses such as interest payments on debt is also a non-operating expense since it does not arise from the company’s core business.
A loss in accounting terms refers to the money lost through non-primary operations of the company. Any negative monetary value (loss) incurred due to secondary sources is recorded as a capital loss. For example, the loss on an investment in equity shares of another company is a capital loss.
Like gains, it is important to identify whether a loss is from a short-term holding or a long-term holding. This is because in taxation, gains can be offset against corresponding losses.
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About the author
Article written in July 2021 by Bijal Gandhi (ESSEC Business School, Master in Management, 2019-2022).