Gains & Losses vs. Revenue & Expenses: An Overview
Most companies report such items as revenues, gains, expenses, and losses on their income statements. Though some of the terms will sound similar, there are different practical uses for gains and losses, as well as for revenues and expenses. Let's take a look at each combination of terms and how they can differ. Ultimately, businesses look to maximize gains and revenues while minimizing expenses and losses. They all affect overall profitability.
Gains and Losses
Gains and losses are the opposing financial results that will be produced through a company's non-primary operations and production processes. Any time a company produces a profit or realizes increased value through secondary sources, such as via lawsuits, investments in financial instruments, or through the disposal of assets, it is considered to be a (capital) gain.
Conversely, a loss is realized whenever a company loses money through secondary activity. If a company sells an asset, the determination of gain versus loss is dependent on the book value of the asset according to the company's financial documents. A loss will also be recorded if a company is ordered by a judge to pay to settle a lawsuit, or if it loses money on a financial investment.
Gains and losses are treated differently for tax purposes depending on if they are short-term (usually occurring in 12 months or less) or long-term (taking place over more than one year). Gains can typically also be offset by corresponding losses for tax purposes.
Financial analysts and investors typically care less about losses and gains, since many of them are likely to be one time events, and are not related to a company's primary business activities.
Revenues and Expenses
Unlike gains and losses, revenues and expenses are not opposite financial results of the same activities. Rather, revenue is the term used to describe income earned through the provision of a business' primary goods or services, while expense is the term for a cost incurred in the process of producing or offering a primary business operation. Investors and analysts will typically give far more weight to these metrics than losses or gains.
Revenues are the gross proceeds a company receives when it sells its goods or services and is sometimes simply referred to as 'sales.' Because there is always a set of costs involved (both fixed and variable) with production, these must be deducted as expenses from revenue to compute a company's net profit.
Of the four terms being considered, expenses are the most diverse. Expenses can be related to a multitude of different types of costs such as labor (salaries, wages, and employee benefits), marketing and advertising, rent, utility bills, insurance, taxes, interest, depreciation, and amortization. Expenses can also be recorded into any number of different line items on an income statement to reflect the particular type of expense.
Several financial ratios and metrics take account of revenues and expenses, such as the often used EBITDA metric, which is earnings before interest, taxes, depreciation and amortization. In other words, it is revenues less expenses related to the production of goods sold.
- Gains and losses are the opposing financial results that will be produced through a company's non-primary operations and production processes.
- Revenue describes income earned through the provision of a business' primary goods or services
- An expense is a cost incurred in the process of producing or offering a primary business operation.