Difference Between Income and Collection
Income means an increase in equity from the sale of a good or the provision of a service and is recorded in the income statement . When we talk about income we are talking in economic terms.
On the other hand, a collection means an entry of cash 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 in order to carry out correct business accounting.
Let's see a simple example to make clear the meaning of income and collection:
An electronic equipment company sells ten computers at a price of €750. From here, we can find ourselves in two situations, that the collection is deferred or in cash. If there is a deferred payment, this sale will mean an income of €7,500. Therefore, it will produce an increase in your assets. Now, being deferred means you'll probably get paid in 30, 60 or 90 days, depending on the agreement with the customer. That is why it is not a charge but an income. If the sale takes place near the end of the financial year, it is possible that the €7,500 will be collected the following year. When the client finally pays for the purchase of the computers, we can say that the payment has been made 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 a deposit and a collection occur simultaneously. This will happen 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 entry will be made, but not as a collection -unless it was in cash- while a collection occurs when the company charges -excuse the redundancy- for the good or service provided, either in cash, by check or by bank transfer.