To know the actual revenue from the operation we have classified Incomes into two subcategories, these are Direct and Indirect Incomes or revenue. and to measure the gross profit on the sale of goods and services. All incomes earned from the sale of goods(in the production business model) or earned from the sale of services (in the services business model) are known as direct Incomes or revenue, but all other incomes are included in the indirect Incomes or Revenue. These are further explained as follows.
Meaning of Direct Incomes: –
The incomes which are earned from the business operational activities are known as Direct Income. In other words, income earned from the sale of the goods and services in which the business is dealing.
Why this income is separated into a different group?
Because with the help of these we can calculate the Gross profit of the business in a particular financial year.
These incomes are differed as per the model of business. We are further classified them into two major subcategories explained as follows: –
- Physical Product Business model
- Services Business Model
Examples: –
- Physical Product Business model:
- For the Computer Parts Manufacture, the income earned from the sale of computer parts will be Direct Income of their business.
- For the Car Manufacture Company, the income earned from the sale of cars and the sale of spare parts will be the Direct Income of their business.
- For the Books Trader, The income earned from the sale of books will be the Direct Income of their business.
- Services Business Model:
- For the Tuitions Center, The income earned from the fee charged to the students will be the Direct Income of their business.
- For the Doctor, The income earned from the fee charged to the patient will be the Direct Income of his business.
Meaning of Indirect Incomes: –
The incomes which are earned from the non-operational activities of the business are known as Indirect Income. In other words, income earned from the sale of scrap or profit earned from the sale of any assets.
These Incomes are separated to calculate the Net profit of the business in a particular financial year.
Examples: –
- Profit on Sale of Assets
- Commission Charged on other business to do their work
- Discount Received at the time of making payment to vendors
- Sale of Scrap
Chart of Difference between Direct and Indirect Incomes: –
|
Basis of Difference |
Direct Incomes |
Indirect Incomes |
|
Meaning |
The Incomes are earned from the sale of goods and services. | The Incomes are earned from other sources than the sale of goods and services. |
|
Help in Calculation of |
Gross Profit | Net Profit |
|
Included in the operating Profit |
These Incomes include operating profits. | These Incomes did not include operating profits. |
|
Financial Statement |
Posted in the trading account | Posted in the Profit and loss account |
|
Related to |
These incomes are related to Operational activities i.e. the sale of goods and services | These expenses are related to the business’s non-operational activities |
|
Need |
Calculation of the income is needed to know the actual earnings from the business operations activities. | Calculation of the income is needed to know the total earnings from the business’s operations and non-operational activities. |
Download the chart:
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The conclusion of the Difference: –
These both are the different types of incomes one is related to the sale of goods & services and the second is related to other non-operating activities. Both are important for every type of business. Only to calculate the specific performance of the business in accounting all incomes are classified into two subcategories.
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