Today, without analyzing the level of income, neither the economy of a state, nor a specific company, nor an individual family can function as productively as possible. Its actual receipt ensures the vital activity of each nominal structure.
Definition of the concept
Income is the money or material assets that a state, a person or an enterprise received as a result of its functioning over a certain period of time.
Macroeconomic analysis studies government profits. Microeconomic analysis is the calculation of money and other profits for a specific time period.
It is also customary to evaluate it as an indicator of a person’s or organization’s ability to enjoy the benefits of civilization.
Economic definition of the concept
Economic science represents income as a consequence of the functioning of an economic unit, arising in the form of a remainder after the realization of the result of labor and the costs incurred in its production.
Income can be called the amount of funds that can be spent by a specific subject without affecting the level of one’s own wealth.
According to this formulation, profit is the main opportunity of capital. As Jacques Rueff, who studied the fundamentals of economics, wrote in his treatise on general order, everything that can provide benefit can be considered capital, regardless of the level of its objectivity. And profit is the amount of benefit received from wealth over a specific time.
Accounting definition of the concept
In accounting, income is the increase in economic benefits resulting from the transfer of assets. This could be money, property, proceeds from debtors, which together increase the company’s funds.
Also, in the accounting sense, income is funds received systematically or one-time by entrepreneurs.
It can also be presented in barter form. The value is displayed for a specific period: ten days, month, quarter.
Sources
Back in the 18th century, pundits named land as the main source of income. Thus, François Quesnay assigned primary importance to this source. Calling it the only one, the author of many works on this topic argued that only through farming on land can one increase the level of one’s profit.
There was also a labor theory that singled out workers as the main producer of profit. They received a salary, and the exploiters received a profit in the form of additional value.
Based on the source, several types of income are determined. Labor or earned is remuneration for work performed. And unearned income is income from rent or natural resources.
In a market economy, when any economic resource can be freely acquired or sold, it can become a source of income in the form of:
- land rent;
- interest or dividends on invested funds;
- salaries for different types of work, including managerial abilities;
- profit from business.
Types of income
This concept is classified according to different criteria. Therefore, there are several directions for determining the type of income.
The following types of income are considered by profit recipients:
- State, that is, those that go to the state from taxes paid and other types of revenues and are used for budgetary purposes.
- profit of organizations, that is, that which legal entities receive from the receipt of money or property, the return of debts, which contributes to the accumulation of capital. Trading activities provide income in the form of sales revenue;
- The profit of the population or that which citizens receive in monetary terms. It can be formed from salary, stipend, fees, pension, benefits, income from sales and rent.
The classification of income by their sources is also in demand in economics.
Factorial
One of the common types of income is factor income, which becomes possible due to the use of resources or factors in production.
The main factor of production is labor.
It provides profit in the form of wages. Income from running your own business is not related to payroll. Rent is received for renting out land, and bank interest is received for invested capital. Mixed income from agriculture is also a factor. It comes directly from the factor exploited for profit.
Real
Real income is manifested in natural form by certain advantages and things available to the subject with his income at the real cost of the goods purchased.
It is also identified with the income of citizens in the form of money at standard prices after paying all the necessary deductions. It is an assessment of the subsistence potential of a particular source of profit and is regulated by current prices. The level of profit and its inviolability affect the stability of the subject in everyday life.
The real income of citizens is considered a share of national income.
This, in turn, makes it possible to satisfy the consumer and savings needs of the same citizens. Their level is established from the actually applied and deferred amounts of values per person.
To derive this indicator, you need to add all cash or in-kind incomes of citizens. The amount should include: salary, pension, fees and other types of profit. The amount of citizens' contributions to the state budget is subtracted from the income received. Voluntary contributions to various organizations, contributions from citizens, and payments for household services are also deducted.
The final result should be the level of real income of the population on which it lives during this period.
Nominal
Primary income in money equivalent is called nominal. It does not take into account the possibilities of the payment unit for purchases, prices, or the level of depreciation of money.
The population's need for money is formed from the required number of currency notes for its full existence. The nominal demand for payment tokens is expressed in money needed by the population. It is formed on the basis of the population’s ability to buy and the existing prices of goods and services. This reveals a real need for funds, the so-called currency shortage.
To make it easy to distinguish between nominal and real income, simple criteria should be taken into account.
Nominal is expressed by means available to the subject. Real income is reflected in the number of assets available for purchase at a given nominal profit.
Other types of income
Science also operates with other types of income. So gross income is the total income from sales, dividends and other income. This concept is more acceptable on a state or enterprise scale. And personal income is formed from funds received in favor of a specific person. In addition to salary, it includes bonuses, dividends, rent and other payments.
Personal income is the amount of money that citizens can allocate for consumption and taxes.
From the amount of this indicator, the family’s income is formed, on which its wealth and standard of living depend. In America, personal income is displayed as a gauge that determines the origin of income in the family and the level of well-being of the population.
Marginal income is a type of additional profit that an enterprise receives from selling goods in excess of the norm, after the return of investments.
Total income is the sum of all profits for a specific period of time. Its calculation does not differentiate between the sources of funds.
Non-operating income is called profit from sales:
- equity participation, investments;
- foreign exchange transactions;
- fines for various types of violations;
- rent;
- inventors' patents;
- loans, bank accounts;
- renewed reserves;
- gift, free services;
- property revaluation;
- repaid accounts payable and so on.
The amount of net present value gives the amount of capital that the entrepreneur plans to earn on the project after the return of investments and the costs of implementing the business.
There are also passive and active types of income. Receiving passive income does not require a serious investment of time and effort: it comes to a person even when he does not make any effort to it. Such residual income is provided by tangible assets: renting something, deposit.
Much wealth rests on non-linear asset returns. This situation can be imagined as one in which money gives a person income. In such profit, of course, there is a share of participation of other people, but they all work at the expense of the subject’s previous material investments without his direct participation.
However, to receive passive income, you must acquire an asset.
And creating such a source of income is the most difficult thing. It turns out that passive income only becomes a reward for work once completed. To create a reason for passive income, which will be equal to the average salary, you will have to work many times more than for regular active income.
Active income is more common for the average person. First of all, this is wages, income from hired work, entrepreneurship, and periodic part-time jobs. Such profit occurs for specific work done. And after payment from work, this income stops.
The main advantage of this type of income is the opportunity to make a quick profit with a very average investment of effort and money.
Calculation
In order to calculate income, the cost of the products or services received for the same period should be subtracted from the proceeds from sales for a specific period of time.
Gross income can be determined by subtracting cost from revenue.
Sales revenue is obtained by subtracting expenses (selling and administrative) from gross income.
To calculate income before taxes, you need to add operating and non-selling income to profit. If the work was unprofitable, then operating costs (enterprise contributions for additional processing and components) are deducted from the revenue.
Rough schemes for calculating income:
- Net income. Determined by removing from revenue the costs of production, management costs, trade, taxes and other costs.
- Net present value. Consists of the difference of all cash receipts and expenses at the time of analysis of a specific project. Income is also calculated as the difference between revenue (turnover) and production costs.
- Operating income. It is the difference between gross profit and operating expenses.
To illustrate the situation, we can consider determining the income of a store selling vegetables and fruits.
The monthly purchase of goods cost 300,000 rubles, and energy, rent, taxes and wages amounted to 25,000 rubles.
The proceeds went to 695,000 rubles.
These data give reason to assert that the store’s net income is: 695,000 - 300,000 - 25,000 = 370,000 rubles.
Such simple formulas help a novice entrepreneur determine the level of profitability of his company.
Factors influencing the indicator
The main factors for changing income levels, for example, in private entrepreneurship, are:
- Scientific nature of labor organization.
- High level of management.
- Economically sound business management.
- Use of energy-saving technologies.
- High professionalism of hired workers.
- Purchase of high quality goods and energy resources at the lowest possible price.
- Intensive management.
- Application of marketing technologies.
- Correct formation of the product range.
- Adequacy of volumes and composition of trade turnover.
- Economically correct markup.
- Availability and high level of related services.
Tricks to Increase Income
To increase the profitability of any enterprise, a whole complex of factors given above, as well as many other similar conditions, is important. But new effective techniques are constantly being invented in economics. For this purpose, “young blood” is introduced into the teams of experienced workers - almost from their student days. This symbiosis makes it possible to revive an established business, because unexpected creative moves often provide a significant head start with the opportunity to get far ahead and achieve much higher profitability for the company.
It is important to study the experience of successful companies selling services, to use their achievements, experience and knowledge. Management should not conduct business at random, but monitor all steps taken before and during their implementation. Systematized work does not allow chaos!
Increasing the productivity and efficiency of the company, reducing frivolous costs, and analyzing risks will lead to the best possible result.
The personality of the leader is also important, who must be not only a professional, sensitive to innovations and market fluctuations, but also an optimist, capable of assuring the team of success in a few words and setting them up for active actions leading to success.
Knowledge of the laws of making profits, the fundamentals of economics and management, as well as the intricacies of the business on which a particular type of business is based, will allow an entrepreneur to make his brainchild one of the most successful in its market segment and achieve maximum income.