Accounting For Income Essay

1876 words - 8 pages

IntroductionAccounting income is often used as the basis for an indication of the result of operation of an entity, a criterion of dividend payments, the basis for taxation on income, a determining factor in wage fixing, a guide to management and so on.Question 1Economist generally defined income in terms of well-offness. The purpose of income calculation in practical affairs is to give people an indication of the amount that they can consume without impoverishing themselves (Hicks, 1946, p.172). However, the accounting rules that define the measurement of income are relatively ad hoc. Revenue/expense measurement and recognition guidelines are separately described in SAC 4. Periodic accounting income appears primarily the result of applying the matching principal, once revenues and expenses are recognised. These traditional definitions which clearly represent the narrow revenue-expense approach suggests five characteristic of accounting income (Accounting Theory, 1993, pg.268).a)Accounting income is based on the actual transaction entered into by the firm, primarily revenues arising from the sales of goods or services minus the costs of these sales. Conventionally, the accounting profession has used transaction approach to income measurement.b)Accounting income is based on the period postulate and refers to the financial performance of the firm during a given period.c)Accounting income is based on the revenue principle and requires the definition, measurement, and recognition of revenues. In general, the realisation principle is the test for the recognition of revenues and, consequently, for the recognition of income.d)Accounting income requires the measurement of expenses in terms of the historical cost, constituting a strict adherence to the cost principle.e) Accounting income requires that the realised revenues of the period be related to appropriate or corresponding relevant coast. Accounting income is therefore based on the matching principle.Edwards and Bell (1961) had widened the scope of the accounting concept of income by including all gains and losses in asset or liabilities held by an entity during a particular period (Accounting Theory Development, 1993, pg168). Four types of income which serve better indication of well-offness are identified. They are current operating profit, realisable cost savings, realised cost savings and realised capital. This is more comprehensive view of income and represents a major change from traditional view as it advocates the reporting of holding gains and losses during a period, on the ground that such reporting would increase the information contain of financial reporting.Question 2Income serves as a measurement device of an organisation's well-offness. As an indicator of wealth maintenance, equity holder and investors often use income as the current market value of the organisation (Epstein B.J. et. al., 1999, p. 62). The information needs of equity investors are similar to management. They require...

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