One of the most important goals of a business is to earn profitable income. The income of the business represents the financial status of a business in the bigger picture. Income generated by a business is of two types including Operating and Non-Operating Income.
Operating vs Non-Operating Income
The main difference between operating and non-operating income is the source through which it is earned. The operating income is earned solely through the core operations of the business whereas non-operating income is earned outside the course of primary business.
Operating Income is defined as the total income or profit of the company earned by its primary business. The operating income of the business is every company’s basic profit. In the income statement, operating income is always stated before the non-operating income.
Non-Operating Income is defined as the total income or profit of the company earned other than its primary business. Income on interests, rental, and dividends, etc., are some common forms of non-operating income. Unlike operating income, non-operating income is generally not earned through small-scale businesses.
Comparison Table Between Operating and Non-Operating Income
| Parameters of Comparison | Operating Income | Non-Operating Income |
| Source | Core operations of the business. | Anything other than the primary business. |
| Calculation | Total revenue – Gross income – Operating expenses | Non-operating revenue – Non-operating expenses. |
| Management | Vital in management and administration. | Not considered for long-term management. |
| Dependency | The company is highly dependent on it. | The company is not dependent on it. |
| Portion | It accounts for most of the company’s income. | It accounts for only a small portion of income. |
What is Operating Income?
Operating Income is defined as the total income or profit of the company earned by its primary business. The operating income of the business is every company’s basic profit and contributes to the majority of the share in the total income. Operating income is shown on the income statement for various reasons such as taxes, debts, and security, etc.
The company’s overall financial status depends on operating income. Since operating income is mostly large in number, it is also the most crucial of finances under administration. Furthermore, operating income plays a vital role in the company’s decision-making and future management plans because the company’s operating income at present will contribute to investments in the future for the expansion of business.
Operating income does not take taxes, interest, any other financial charges into consideration, and hence, it is not the same as the resultant profit. While a high operating income is mostly an indication of good profitability, the resultant profit might be much less. For example, if a business is doing well and has a high operating income but the company has to spend a portion of its income on outstanding debts, the profit will be much less.
The final operating income of a company’s business is calculated after the deduction of operating expenses. These include selling, depreciation, and other administrative expenses.
What is Non-Operating Income?
Non-Operating Income is defined as the total income or profit of the company earned other than its primary business. Income on interests, rental, and dividends, etc., are some common forms of non-operating income. Non-operating income is also displayed below operating income on the income statement.
The company’s overall financial status does not depend on its non-operating income. The non-operating income generally shares only a small portion of the total income, and hence, it is not taken into consideration while deciding crucial management plans. A very low income tax is generally charged from non-operating incomes as the amount is less. Hence, non-operating income does contribute to the resultant profit of the business.
Separation of non-operating income from the operating income is a crucial step to solely understand the financial status of primary business only. It provides a much clearer picture of how much revenue is turning into profit. However, not all businesses produce non-operating income. Businesses under large-scale companies only can produce extra income. Most small-scale businesses rely only on operating incomes.
The final non-operating income is calculated after the reduction of common small-scale expenses. These expenses include amortization, lawsuit settlements, and selling assets, etc.
Main Differences Between Operating and Non-Operating Income
- Operating income is produced from the primary business of the company whereas non-operating income is produced from anything other than primary businesses.
- The financial status of the company is decided by its operating income rather than non-operating income.
- Operating income is earned by all businesses whereas non-operating income is not earned by small-scale businesses.
- Operating income is vital in the company’s decision-making and management whereas non-operating is not considered for long-term management.
- Operating income is a large portion of the total income whereas non-operating income is a very small portion of the whole.
Conclusion
Businesses these days are complex and detailed. With leading firms and companies owning large-scale businesses, the profit made is also large. As businesses are complex, management also is quite a task. Therefore, it is only wise to divide the total income made into various categories to better understand the financial structure. The division of income into operating and non-operating income serves this purpose.
While both operating and non-operating incomes have their individual significance, working on the operating income is given the utmost priority and it only makes sense to do so. The core operations of the company will make it competitive, and the income from them defines the financial status of the company.
On the other hand, non-operating incomes have very little contribution to the company’s long-term growth. However, the income amount is not as less to simply neglect. Non-operating incomes help provide a much clearer picture of invested revenue. While most small-scale businesses don’t have any side income, it is a noticeable extra income to large firms.
Both the incomes contribute together to Earnings Before Interest and Taxes (EBIT). After the procedure of income tax reduction from earnings, a final profit is obtained.
References
- https://link.springer.com/article/10.1023/A:1027328418571
- https://www.sciencedirect.com/science/article/pii/S0897366004170062