Difference between income and collection

An income means an increase in equity for the sale of a good or the provision of a service and is accounted for in the income statement . When we talk about income we are talking in economic terms.

On the other hand, a collection means a cash inflow for the sale of a good or the provision of a service and is recorded in the balance sheet . When we talk about collection we are talking in financial terms.

It is very important to differentiate these concepts to keep a correct business accounting.

Example

Let’s see a simple example to make clear the meaning of income and collection:

An electronic equipment company sells ten computers for € 750. From here, we can find ourselves in two situations, whether the payment is deferred or cash. If there is a deferred charge, this sale will mean an income of € 7500. Therefore, it will produce an increase in your assets. Now, being postponed means that it will probably be charged within 30, 60 or 90 days, depending on the agreement with the client. That is why it is not a collection but an income. If the sale takes place near the end of the year, it is possible that the collection of € 7500 will occur the following year. When the customer finally pays for the purchase of the computers, we can say that the payment has taken place because there has been a cash inflow, that is, an increase in the company’s treasury.

The following conclusions can be drawn from the example:

  • An income does not have to be a collection, nor vice versa.
  • It is possible that there will be an income and a collection simultaneously. This will occur when the payment is in cash.

In summary, an income does not mean that the company charges for the good or service provided, only the corresponding accounting note will be made, but not as a payment – unless it was in cash – while a collection occurs when the company charges -value redundancy- for the good or service provided, either in cash, by check or by bank transfer.

by Abdullah Sam
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