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Income Concept

Income Concept

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Published by: Rifát Khàn ßørnø on Jul 01, 2012
Copyright:Attribution Non-commercial


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What is Income?
Income is the consumption and savings opportunity gained by an entity within aspecified time frame, which is generally expressed in monetary terms.
However,for households and individuals, "income is the sum of all the wages, salaries,profits, interests payments, rents and other forms of earnings received... in a givenperiod of time."
For firms, income generally refers to net-profit: what remains of revenue after expenses have been subtracted. In the field of public economics, itmay refer to the accumulation of both monetary and non-monetary consumptionability, the former being used as a proxy for total income.
Income Concepts:
Accounting Concept of Income:
Accounting income is defined as an estimate of performance in the operations of acompany. It is influenced by financing and investing decisions. Accounting incomeor loss generally recognizes realized gains and losses, and does not recognizeunrealized gains and losses.For income to be realized it must be related to actual business transactions; ineffect, the cash you have must increase or decrease. A change in market valuerather than cash received is not an accounting income; it is an economic income.Economic income or loss recognizes all gains and losses whether realized orunrealized.Central to the accounting profits definition is whether a gain or loss is realized orunrealized. When a gain or loss is realized it becomes an income suitable foraccounting. The accounting value for this asset is generally listed at the historical
value of the transaction selling it. When a gain or loss is unrealized it may or maynot be accounted for in general. This depends on the placement of the gaining orlosing asset in the balance sheet. Despite that this gain or loss may be accountedfor; the fact that it is unrealized makes it an economic income or loss. The accrualaccounting income statement will look very different from the fair valueaccounting statement.Essentially, accounting income defined the ways companies evaluate their cashstanding after the sale of an asset. This, once again, differs from economic incomein that economic income is the way for companies to account for changes in thevalue of a given asset in the market. The deciding factor is whether or not atransaction takes place.Accounting income defined by the following equation:
= R
Accounting income
= Realized revenue of the period
= Expenses (corresponding history)
Accounting Conservatism
 Accounting income or loss does not incorporate unrealized gains and lossesbecause of the convention of accounting conservatism. When accountants confrontuncertainty in regard to method or procedure, they conventionally choose theoption that is least likely to overstate income or asset value. In the case of realizedversus unrealized gains and losses, it is more conservative from an accountingperspective to exclude increases or decreases in value that have not yet beenactualized.
Accounting Income Example
 A perfect example of accounting profit occurs every day in the stock market. Zatais a company which invests in market securities. Zata currently owns a share of ABstock worth $600. The following week Zata notices the share of AB stock hasincreased in value from $600 to $650. Zata sells this share of AB stock andreceives $650 from the sale of one share of AB stock.Zata experienced an accounting income: their share of AB stock was sold for $50more than it was initially worth. Thus, Zata has a realized accounting gain of $50.The accounting income calculation is $650 - $600 = $50.If Zata never sold the share of AB stock it would have experienced an economicgain of $50. This is shown by the fact that Zata did not have a transaction in whichcash increased by $50.
Accounting Income vs. Taxable Income
 The treatment of accounting income and taxable income is different. The inclusionof tax accounting confuses the matter. Under GAAP, income and expenses arematched to the period in which they are incurred. This means that the accountingincome Investors received was incurred on the specific day that it sold the share of Google stock. With tax accounting, however, taxable income and expenses arematched to the period upon which the I.R.S. decides. Investor may or may notincur an increase in taxable income based on I.R.S. regulations. It has incurred thispotential increase in the accounting period the I.R.S. chooses. This means that anaccounting income under GAAP may not be considered an accounting profit underI.R.S. tax rules.

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