The term “factor income” often appears in economics textbooks, discussions of GDP, and articles about income distribution. It is also useful in day-to-day business: it helps you see which resources a company pays for and who receives the money.
In simple terms, factor income is the income received by the owners of factors of production: labour, capital, land and other natural resources, and entrepreneurship.
Below, we look at the main forms of factor income, distinguish them from revenue and profit, and apply the idea to a project business where payments arrive in stages.
Contents:
What is factor income?
Factor income arises when a factor of production contributes to creating a product. The person who supplies labour, capital, or a resource receives compensation for its use.
In the UN System of National Accounts 2008, the generation of income account records compensation of employees and operating surplus or mixed income. The allocation of primary income account also records property income. This is a macroeconomic classification; an individual company must calculate its figures under its own accounting rules.
The idea is practical even though the term sounds academic. In a project, the customer pays the business; the business then pays those who contributed to the work. The remainder includes the owner's return and funds retained for development.
Types of factor income
Basic economics commonly groups factor income into four forms: wages, rent, interest, and profit.
You can see these forms in project work. Rent, for example, can be a payment to the owner of land used for a construction project. Payments for an office or equipment lease also matter as expenses, but the UN System of National Accounts distinguishes rentals of produced assets from rent for natural resources.
- Wages compensate labour, including salaries and payments for completed work.
- Rent is income received by the owner of land or another natural resource for allowing its use.
- Interest is income earned by the owner of capital, such as interest on a deposit, bond, or loan. For a borrowing business, it appears as an interest expense.
- Profit is the return to the entrepreneur or owner for organising the business and taking risk.
| Factor | Factor income | Recipient | Project-business example |
|---|---|---|---|
| Labour | Wages | Employees and contractors | Payments to tradespeople, site managers, engineers, and designers |
| Land and natural resources | Rent | Resource owner | Payment for using a plot of land for a project |
| Capital | Interest | Bank, investor, or lender | Loan interest or interest on a reserve deposit |
| Entrepreneurship | Profit | Business owner | The net result after expenses and obligations |
To keep these payments separate from the company's result, track revenue, costs, and profit separately. The difference between margin and markup is explained in this Russian-language 101 article.
How does factor income differ from income, revenue, and profit?
Confusion starts when every incoming payment is called income. When managing a project, distinguish cash receipts, recognised revenue, and profit.
A company's income is a recognised increase in economic benefits during a period, such as revenue from completed work or other income. A cash receipt describes the movement of money. An advance payment increases cash, but does not by itself mean that income has been earned or that a profit has been made.
Revenue comes from fulfilled obligations. As the 101 blog explains, it is recognised when the work has been performed, rather than simply when money reaches the account.
Profit is the result after the relevant expenses are deducted from revenue. Which expenses count depends on whether you are calculating gross, operating, or net profit.
Factor income asks a different question: which resource gave rise to a claim to compensation, and who receives it?
Transfers, such as social benefits, are not payment for a resource's participation in production. In national accounts, they are recorded in the secondary distribution of income.