Learn about the comparison among revenues, expenses, gains and losses.
1. Revenues and gains are similar in several ways, but some differences are significant, especially in displaying information about an enterprise’s performance. Revenues and expenses provide different kinds of information from gains and losses, or at least information with a different emphasis.
Revenues and expenses result from an enterprise’s on-going major or central operations and activities that constitute an enterprise’s process—that is, from activities such as producing or delivering goods, rendering services, lending, insuring, investing and financing.
In contrast, gains and losses result from incidental or peripheral transactions of an enterprise with other entities and from other events and circumstances affecting it.
2. Some gains and losses may be considered operating gains and losses and may be closely related to revenue and expenses. Revenue and expenses are commonly displayed as gross inflows or outflows of net assets, while gains and losses are usually displayed as net inflows or outflows.
3. Distinctions between revenues and gains and between expenses and losses in a particular enterprise depend to a significant extent on the nature of the enterprise, its operations, and its other activities.
Items that are revenues for one kind of enterprise are gains for another, and items that are expenses for one kind of enterprise are losses for another. For example, investments in securities that may be sources of revenues and expenses for insurance or investment companies may be sources of gains and losses in manufacturing or merchandising firms.
Sales of furniture result in revenues and expenses and for a furniture manufacturer, a furniture jobber, or a retail furniture store, which are selling products or inventories, but usually result in gains or losses for an automobile manufacturer, a bank, a pharmaceutical company or a theatre, which are selling part of their facilities.
Technological changes may be sources of gains or losses to most kinds of enterprises but may be characteristic of the operations of high technology or research-oriented enterprises.
Events such as commodity price changes and foreign exchange rate changes that occur while assets are being used or produced or liabilities are owed may directly or indirectly affect the amount of revenues or expenses for most enterprises, but they are sources of revenues or expenses only for enterprises for which trading in foreign exchange or investing in securities is a major or central activity.
4. Revenues and expenses are normally displayed “gross” while gains and losses are normally displayed ‘net.’ For example, sales by a furniture manufacturer to furniture jobbers usually result in displays in financial statements of both the inflow and outflow aspects of the transaction—that is both revenues and expenses are displayed.
Revenues are a ‘gross’ amount reflecting actual or expected cash receipts from the sales. Expenses are also a ‘Gross’ amount reflecting actual or expected cash outlays to make or buy the assets sold. The expenses may then be deducted from the revenues to display a ‘net’ amount often called gross margin or gross profit on sale of product or output.
If, however, a pharmaceutical company or a theatre sells furniture, it normally displays only the ‘net’ gain or loss. That is, it deducts the carrying amount of the furniture sold from the net proceeds of the sale before displaying the effects of the transaction and normally displays only the ‘net’ gain or loss from sale of capital assets.
5. It is generally deemed useful or necessary to display both inflows and outflows aspects (revenue and expenses) of the transactions and activities that constitute an enterprise’s on-going major or central earning process. In contrast, it is generally considered adequate to display only the net results (gains or losses) of incidental or peripheral transactions or of the effects of other events or circumstances affecting an enterprise, although some details may be disclosed in financial statements, in notes, or outside the financial statements.
Since a primary purpose of distinguishing gains and losses from revenues and expenses is to make displays of information about an enterprise’s sources of comprehensive income as useful as possible, fine distinctions between revenues and gains and between expenses and losses are principally matters of meaningful reporting.