Concept of Income
The concept of income is the most important concept amont all other accounting concept. The computation of net income has been the central theme of financial accounting since the developement of generally accepted accounting principles in the 1930s. One of the most important functions of accountants is to measure business income. Practically, income is the pivot around which the entire accounting process moves. The ultimate object of all measurement of income. As a matter of fact, a business cannot have any income of its own. The income reported is actually that of the owners of the business. According to Paton, "Net income or profit is the amount accruing to the owners." "That is why, in accounting, profit is a credit item indicating a promise of the business in favour of ownership. Thus, business is rather a purveyor of income to its owners than a claimant for the same."
Objectives of Net Income Reporting
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Net income reporting gives an idea of the return on capital employed. Return on capital employed is a master ratio which gives an idea of overall efficiency of the business.
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Profitability of the capital projects can be ascertained with the help of net income ; a project yielding higher return is favoured. Thus, net income reporting is a helpful tool for making capital budgeting decisions.
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The future course of the business can be predicted on the basis of historical income figures.
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The ascertainment of net income lays emphasis on the need to distinguish between invested capital and income. This distinction is helpful in paying devindeds out of income only and not out of capital. If there is no reporting of net income, it is possible that dividends may be paid out of capital leading to erosion of capital which is not desirable.
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The ascertainment of income is a base for taxation because income tax is levied on the basis of income.
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In evaluating the use of scarce resources, the use of income figure is a very helpful guide. The activiteis which give higher return on scare resources are to be preferred to increase the wealth of the business.
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For the purpose of giving a portion of the profit to the employees, the ascertainment of net income is a must. Trade unions feel satisfied when net income is reported to them because these unions can see that workers are not being exploited and their due share in profit is being given.
Defination of Income
To a layman income is what he earns in cash or its equivalent by producing or selling goods or rendering service like salary or wages, rent from property, intrested earned on giving loat etc. According to Hick, "We ought to define a man's income as the maximum value which he can consume during a week, and still expect to be as well of at the end of the week as he was at the beginning". In this definition of income the implicit assumption is that even if the whole of income is consumed by an individuals, his financial position continues to be as good as before.
The income of an incifidual has been defined. But in accounting we are concerned with income of an entity because accounting is mainly concerned with an enterprise. Individuals create utilities by doing work and what they get in exchange is their income. Similarly a business unit generates utility through production or rendering service by using different factors of production and what it gets in exchange after deducting cost of various factors of production employeed by it is its income.
Econimists are of the view that income is the favourable change in wealth which takes place due to business operations. For the calculation of income as per this definition, determination of the amount of wealth at first and second point of time is made taking into consideration replacement values of various assets at those points of time. This definition does not give a clear picture of income because it suffers from the following defects:
