What is the financial income in a company?

The economic operations carried out by a company, being of different types, generate different types of income. Identifying them is essential, among other things, to make a correct classification of accounts and to keep your accounting in order and up to date.

Financial income is that which, independently of the contributions made by the partners to constitute the capital of the company, is capable of generating a return for the company. In other words, they are part of the financial indicators of the company's profitability.

In this article, Appvizer details them by means of examples and reviews their classification, according to the General Accounting Plan (PGC).

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What are financial income and expenses?

Generally speaking, the wealth of a company increases or decreases when it carries out economic operations. It is necessary to know the origin and nature of these operations in order to:

• The correct classification of income and expenses,
• the determination of the profits and losses of the business.

Financial income

Income is defined as an increase in the net worth of the company, either by an increase in the value of its assets or by a decrease in its liabilities. In itself, it is the flow resulting from the operations of production and marketing of the goods or services proposed by the company.

There are different types of income:

• Operating income: This refers to the income that the company or corporation receives directly from the development of its economic activity.
• Financial income: This is derived from investments made by the company in order to obtain a profit, such as investments in other companies that generate dividends.
• Extraordinary income: These are those originated by occasional and non-repetitive or ordinary operations, which are characterized by the fact that they do not derive from the company's main activity.

Expenses

As for expenses, we could define them as a decrease in the company's net worth, due to outflows (decrease in assets) or debts (increase in liabilities) that the company has.

Like revenues, they can also be classified according to their nature into:

• Operating or operating expenses,
• financial expenses,
• extraordinary expenses.

Financial income: accounts according to the General Chart of Accounts

Classification of accounts

The General Accounting Plan (PGC) classifies the income and expenses that a company may have in different types of accounts:

• Assets: These are the assets and rights of the company.
• Liabilities: These are the obligations and debts of the company.
• Net: This is the amount contributed by the partners for the incorporation and start-up of the company's operations.

The analysis and monitoring of these accounts in the balance sheet allows to know the financial situation of the company at a given time.

On the other hand, to obtain information on the company's profitability, the management accounts are analyzed. These are made up of the following elements:

• Group 6 - Expenses and purchases,
• Group 7 - Sales and income.

At the end of the year or of the economic period determined by the company to make its accounting closing, when we make the difference between the accounts of Group 7 and the accounts of Group 6 in the profit and loss balance sheet, is when we can analyze if the company had losses or profits.

Financial income: subgroup accounts

Group 7 of the PGC compiles information relating to:

• The disposal of goods and the rendering of services which are the object of the company's business,
• other income,
• changes in inventories,
• profit for the year.

For its part, account 76 corresponding to financial income, contemplates the following classification of related accounts:

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Financial income: how is it calculated? → Examples

Before looking at some calculation examples, let's quickly recall the following:

• In asset accounts are posted:
  • Increases → on the debit side,
  • decreases → on the credit side.
• In liability accounts are posted:
  • Increases → credits,
  • decreases → debits.

The PGC stipulates the following for revenue recognition:

All Group 7 accounts are debited at year-end with a credit to account 129.

The above is useful if we consider that revenue accounts work like liability accounts.

🔵 Example: if a company that sells supplies for the assembly of video security systems makes a sale for one million euros, this value (increase) will go to the credit.

The revenue account will be debited in case the company has to make a return to the customer, after the sale. Let us suppose that out of this million euros the company has to return 1,500 euros to the customer, which it forgot to include in the invoice, as a commercial gesture. This amount must be debited to the debit side.

🔵 Example :

Let us now take the case of a company that sells pieces of furniture (chairs, lockers, etc.) for offices and has made a sale for an amount of €500 to a startup. Since the startup had planned to make this purchase in April, it is able to pay the amount in cash. The posting of the entry would be made as follows:

Accounts involved:

• 700 - Sale of goods,
• 570 - Cash.

Since account 700 is a revenue account, it will increase on the credit side:

Account 570, on the other hand, is an asset account, i.e. it will increase on the debit side:

In this way, the seat is balanced.

As you could see, financial income is very easy to analyze, once you are clear about its concept and origin. The automation of the calculation of accounting entries is possible thanks to the implementation of an accounting software.

The great advantage of this type of tool is that it allows you to entrust your accounting process to the different functionalities it offers, so that you can concentrate on those activities that bring more value to your company.