What Is Ordinary Income?

Revenue refers to the total inflow of economic benefits that are formed in the daily activities of an enterprise and will result in an increase in owner's equity that are not related to the capital invested by the owner.

[shu rù]

Income (English: Income) refers to an individual, including an individual or a company, selling goods, providing

Highlights of income

Revenue is a basic element of financial accounting.

The broad concept of income treats the inflow of economic benefits formed by the daily activities of enterprises and other activities as income;
The narrow income concept restricts income to the total inflow of economic benefits formed by the daily activities of the company;
The current system in China adopts the concept of income in a narrow sense, that is, income refers to the total inflow of economic benefits that are formed in the daily activities of the enterprise, which will cause the owner's equity to increase and has nothing to do with the capital invested by the owner. ^[2]

Income characteristics

Revenue is generated from the day-to-day activities of the business, not from incidental transactions or events;
Income is the total inflow of economic benefits unrelated to the capital invested by the owner;
Income will inevitably lead to an increase in business owners' equity;
Revenue only includes the inflow of the company's economic benefits, and does not include money collected for third parties or customers.

Income structure

According to the nature of the enterprise's daily activities, income can be divided into income from sales of goods, income from the provision of labor services, income from the use of transitional assets, and income from construction contracts.
According to the importance of daily activities in the enterprise, the income can be divided into main business income and other business income. ^[3]

Revenue recognition conditions

On July 5, 2017, the Ministry of Finance revised and issued the "Accounting Standards for Business Enterprises No. 14-Revenue" (hereinafter referred to as the "New Revenue Standard"), and revised the conditions for revenue recognition. When the contract between the enterprise and the customer meets the following conditions at the same time, the enterprise should recognize revenue when the customer obtains control of the relevant goods: (1) the parties to the contract have approved the contract and promised to perform their respective obligations; (2) the contract is clear The rights and obligations of the parties to the contract with respect to the transferred goods or the provision of labor services (hereinafter referred to as "transferred goods"); (3) the contract has clear payment terms related to the transferred goods; (4) the contract has commercial substance, That is, fulfilling the contract will change the risk, time distribution or amount of the company's future cash flow; (5) The consideration that the company is entitled to obtain by transferring goods to customers is likely to be recovered. ^[4]

Income principle

1. Revenue from sales of goods:

(1) The enterprise has transferred the main risks and rewards in the ownership of the goods to the purchaser.

Risks and rewards in product ownership

Judgement on whether the main risks and rewards in the ownership of the goods have been transferred

(2) The company neither retains the right to continue management, which is usually associated with ownership, nor implements control over the goods sold.

(3) The economic benefits related to the transaction are likely to flow into the enterprise.

The economic benefits related to the transaction are mainly reflected in the price of the goods sold;

In practice, the goods sold by the enterprise meet the requirements stipulated in the contract or agreement, and the invoice has been delivered to the buyer. The buyer also promises to pay, which means that the price of the goods sold can be recovered;

If the enterprise judges that the price cannot be recovered, it shall provide reliable evidence.

(4) Relevant income and costs can be reliably measured.

Whether the revenue can be measured reliably is the basic premise for recognizing revenue;

Costs cannot be measured reliably. Even if other conditions are met, the related revenue cannot be recognized.

Accounting of income:

1.Accounting of main business income

The "main business income" account is used to calculate the income generated by the enterprise in daily activities such as selling goods, providing labor services, and transferring asset use rights. Under the "main business income" account, a detailed account should be set up according to the type of main business for detailed accounting. There should be no balance at the end of this account.

2. Provide labor income

If the results of the labor service transaction provided by the enterprise on the balance sheet date can be reliably estimated, the revenue from the labor service is recognized using the percentage of completion method.

(1) The conditions under which labor service transactions can be reliably estimated.

The amount of income that can be reliably measured means that the total amount of income from the provision of labor services can be reasonably estimated;

The related economic benefits are likely to flow into the enterprise, which means that the possibility of recovering the total labor income is greater than the possibility of being unable to recover;

The completion progress of the transaction can be reliably determined, which means that the completion progress of the transaction can be reasonably estimated;

The costs that have occurred and will occur in a transaction can be reliably measured, which means that the costs that have occurred and will occur in a transaction can be reasonably estimated.

(2) Specific application of completion percentage

The percentage-of-completion method refers to a method of recognizing revenue and expenses in accordance with the progress of completion of a service transaction.

The enterprise shall, on the date of assets and liabilities, multiply the total labor service income by the progress of completion, and deduct the amount of labor service income received in the current accounting period after deducting the accumulated labor service income from the previous accounting period. The amount of accumulated labor costs in the accounting period is carried forward to the current labor costs. The formula is as follows:

Revenue recognized in the current period = total labor service revenue * completion progress of outstanding labor services in the current period-revenue recognized in previous periods

3. Transfer of income from asset use rights

(1) The revenue from the transfer of asset use rights can be recognized only if it meets the following conditions at the same time:

The related economic benefits are likely to flow into the enterprise;

The amount of income can be reliably measured.

(2) Measurement of income from transfer of asset use rights

Interest income: It mainly refers to the interest income generated by financial companies' foreign exchange, and the interest income formed by transactions between peers.

The enterprise shall, on the balance sheet date, calculate and determine the total interest income according to the time when others use the company's monetary funds and the actual interest rate.

Revenue income: mainly refers to the royalty income from the transfer of the right to use intangible assets (such as trademark rights, patent rights, franchise rights, software, copyrights) and other assets;

It shall be calculated and determined in accordance with the charging time and method agreed in the relevant contract or agreement.

4. Other business income

The "other business income" account is used to calculate the income of other sales or other businesses of the enterprise in addition to the main business income, such as revenue from sales of materials, consignment purchasing, and rental of packaging materials. Under the other business income account, a detailed account should be set up according to the type of other business, such as material sales, purchasing agent sales, and package rental, for detailed accounting. There should be no balance at the end of this account.

Income classification

Main business income: It comes from the main items in the daily activities of the enterprise to achieve its business objectives, such as the sales of goods by industrial and commercial enterprises, bank loans and settlement.

Other business income: from other daily activities other than the main business, such as sales of materials by industrial enterprises, provision of non-industrial labor services, etc.

Income definition

Per capita income by province According to the accounting standards, income refers to the total inflow of economic benefits that are formed in the daily activities of an enterprise and will result in an increase in owner's equity that is not related to the capital invested by the owner.

According to Article 6 of the Corporate Income Tax Law, an enterprise's total income is obtained from various sources in monetary and non-monetary forms. Including: income from the sale of goods, income from the provision of labor services, income from the transfer of property, income from equity investments such as dividends, dividends, interest income, rental income, royalty income, donation income, and other income. Article 7 stipulates that the following incomes in total income are non-taxable income: fiscal appropriations, administrative and institutional fees collected according to law and incorporated into financial management, government funds, and other non-taxable income stipulated by the State Council. Article 26 stipulates that the following income of an enterprise is tax-exempt income: interest income from government bonds, dividends and dividend income between eligible resident enterprises, and non-resident enterprises that set up institutions and venues in China shall obtain from the resident enterprise and the institution. Dividends and bonus income that are actually linked to the market and the income of qualified non-profit public welfare organizations.

The differences between the accounting standards and the income concept defined by tax law are reflected in several aspects:

First, the total income in the tax law is a concept that contains income content that is often broader than that required by accounting standards. All income that can improve a company's ability to pay taxes should be included in the total income and included in the corporate income tax return. The total income should be the income that increases the total assets of the enterprise or decreases the total liabilities, and at the same time changes the owner's equity and improves the ability to pay taxes. If income increases or decreases assets and liabilities by the same amount, which does not result in changes in owner's equity and increase of tax capacity, it is not taxable income, such as bank loans or payments received by companies on behalf of third parties, etc., should not be recognized as Total income.

Second, accounting standards differ from the scope of income defined by tax law. The accounting income standard only regulates the income from sales of goods, the provision of labor services, and the transfer of income from the right to use assets. Income derived from long-term equity investment, construction contracts, leases, original insurance contracts, reinsurance contracts, etc., applies other relevant accounting standards. The tax law includes more income items than total accounting income. The company's income from sales of goods, income from the provision of labor services, income from property transfers, dividends and other equity investment income, interest income, rental income, and royalties income , Accepting donation income, corporate asset surplus income, truly unpayable payables, receivables that have been recovered after the company has made bad debt losses, debt restructuring income, subsidy income, liquidated damages income, deemed sales income, etc. Shall be included in the total income.

Third, corporate income tax has the concept of non-taxable income, which is not in accounting. Non-taxable income in tax law refers to the category of income that should not be permanently classified as a taxable scope from the principle of corporate income tax. It is not in the nature and origin of economic benefits brought by corporate profit-making activities and is not liable for taxation. Obligatory income. Because from the perspective of the legislative spirit of corporate income tax, the tax base of income tax should be the income generated by business operations, while government budget appropriations, administrative fees collected according to law and incorporated into financial management, government funds, etc. Taxation of income will lead to a meaningless increase in government revenue and expenditure costs. Non-taxable income is not a tax benefit.

Fourth, corporate income tax has the concept of tax-exempt income, which is not in accounting. Corporate income tax exempt income refers to the income tax liability of the enterprise, and the government can be exempt from taxation for a certain period of time according to the needs of social and economic policies, and it is possible to resume taxation for a period of time. For example, interest income from government bonds, dividends and dividend income between resident enterprises, non-resident enterprises that set up institutions and venues in China receive dividends and bonus income from resident enterprises that have actual contact with the institution and venue, and non-profits of non-profit public welfare organizations Income, etc. Tax-free income is a tax benefit.