Information AboutIncome |
|
Internationally, the accounting term income is synonymous to term Revenue . One of the best accounting definitions of income is the one used by International Accounting Standards Board (quotation from IFRS Framework): Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Meaning within U.S. accountancy In U.S. business and Accounting , however, income most often means the amount of money that a company earns after paying for all its costs. Outside the U.S., the term is usually ''' Profit ''' or '''earnings'''. To calculate a company's income, it starts with its amount of Revenue , deducts all costs, including such things as employees' salaries and Depreciation , and the number that results is its income, which may be a negative number. This money is typically reinvested in the business, paid in Corporate Tax and used to pay the owners (the shareholders) a Dividend . All Public Companies are required to provide Financial Statements on a quarterly basis. The statement of income is an important part of this. Some companies also provide a more rosy financial report of their income, with '' Pro Forma '' reporting, or, EBITDA reporting. ''Pro forma'' income is an estimate of how much the company would have earned without including the negative effect of exceptional "one-time events", supposedly in order to show investors how much money the company would have made under normal circumstances if these exceptional, one-time events had not occurred. Critics charge that, in most cases, the "one-time events" are normal business events, such as an acquisition of another company or a Write Off of a cancelled project or division, and that ''pro forma'' reporting is an attempt to mislead investors by painting a rosy financial picture. Besides that, when discussing results with analysts and shareholders, CEOs and CFOs have a tendency to do even more "hypothetical accounting". EBITDA stands for "earnings before interest, taxes, depreciation, and amortisation", and is also criticised for being an attempt to mislead investors. Warren Buffett has criticised EBITDA reporting, famously asking, "Does management think the Tooth Fairy pays for capital expenditures?" It is common for some other companies, such as Real Estate Investment Trusts , to present reports using a standard called FFO , or "Funds From Operations". Like EBITDA reporting, FFO ignores depreciation and amortization. This is widely accepted in the industry, as Real Estate values tend to increase rather than decrease over time, and many data sites report Earnings Per Share data using FFO. Meaning within economic science In Economics , income is the constraint to unlimited Consumer purchases. Consumers can purchase a limited number of goods represented by their "budget constraint". The basic equation for this is Y = Px × x + Py × y, where Px is the price of good x, x is the quantity of good x, and Y is the income (Py and y are similar to Px and x). If you need to examine more than two goods, you can add more on. This equation tells us two things. First, if you buy one more of good x, you get Px/Py less of good y. Here, Px/Py is known as the rate of substitution. Secondly, if the price of x changes, then the rate of substitution changes. This causes demand curves to slope down. While it may make some sense to suppose that an individual has a limited income for the time being, the level of income is not fixed over time. The same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. This part is the subject of theory of economic development. Again, something may happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. This would be studied by theory of business cycle. Distribution of Income The distribution of income within a society can be measured by the Lorenz Curve and the Gini Coefficient . This may reveal the existence of politically unacceptable inequality of income. There may be strong political pressure to adopt policies of income redistribution by taxing the richer people at a higher rate than the middle class and giving subsidies or income-support to the very poor in a variety of ways. Political economy tends to be highly controversial because people have conflicting opinion regarding income redistribution. National income, measured by statistics such as the Net National Income (NNI), measures the total income of all individuals in the economy. For more information see Measures Of National Income And Output . Economic Theory of Income In economic science, theory of income wants to explain exactly why and how income happens to be what it is rather than being more or less. Why are some people (and countries) poor while other people (and countries) are rich? Why does income grow during booms but stagnates or declines during depressions? In short what determines income? Alfred Marshall made it difficult for economic scientists to raise the question of income determination properly. His Partial Equilibrium Approach creates the habit of forgetting or ignoring relevant determining variables, and that is exactly the problem. In microeconomics under his influence, people study producer behavior to understand how much output an individual produces. The market value of this output is called income. The sum of values of these outputs of all individuals within a given accounting period would give national income. But it does not seem to do so. Hence Marshall's most famous pupil creates an antidote to microeconomics, which is known as macroeconomics. It begins with the assertion by Keynes that completely contradicts his master Alfred Marshall. While Marshall says that equality of demand and supply determines price, Keynes says that the same equality determines income (albeit now at aggregate level). But nobody has a satisfactory answer, and economists are forever fighting over the issue of whether money does or does not affect output/income. Microeconomics is also known as price theory while macroeconomics is known as income theory. The trouble is that a proper model must determine output and their prices both at once in the same model, but Marshall assumes given incomes to deduce price while Keynes assumes given prices to deduce incomes, and nobody puts both together to get at the proper answer. The proper answer must necessarily fuse microeconomics and macroeconomics to analyze incomes and prices together. In it, one producer will be shown to depend on other people both as his customers and as his suppliers. Indeed, a change in price changes income, and a change in income changes prices. The interactions are criticla in the final outcome. To pretend that one of them remains unchanged while the other changes is the root of the failure to explain income satisfactorily. Leon Walras argued strongly against partial equilibrium approach and proposed general equilibrium approch as the more acceptable alternative. An even better general equilibrium model is Leontief's Input-output Model . This last one is suitable to examine how interdenedenece works to determine both output and price. The use of input-output model to examine simultaneous determination of both prices and incomes leads to Analysis ]. The increase in the income of one person causes the income of other persons to increase too because with the increased income of the first person, there is new demand for products of other people. This is known vaguely as Income Multiplier proposed by Keynes. The growth of income over time is studied by models of Economic Development . Such models show that the structure of output changes over time to support a permanently higher level of income. In general, for growth of income to higher levels, the proportion of service must grow the fastest, and that of industrial products grow the second fastest and those of the primary sector (natural resource based agriculture, mining, fishing, forestry etc) growing at the lowest rates. As such, the share of primary sector shrinks while that of the service sector expands. To allow this structural transformation for income growth, the location of production shifts progressively to urban areas, which ultimately produce over 95% of the income. The concentration of infrastructure, facilities and amenities in the urban areas creates massive economies of scale, scope and nearness. In short, it makes all factors more productive in towns than in villages. Sadly, the role played by money and the financial sector in promoting output/income growth remains disputed. Income in Philosophy and Ethics Material success in the shape of high income has often been denounced by great philosophers and especially by religious reformers. Environmentalists of the present era also seem to dislike the madness associated with growth of income beyond ordinary necessities of life to the detriment of the environment, not to talk of the degradation of moral standards and in some view, quality of life. See also
External links
|