The Economic and Accounting Concepts of Income - Essay Example

Incomes are generally earnings or rewards that accrue or are earned as a result of employment or application of a factor of production, e.g. land, labour, capital and entrepreneurship.

Accounting income consequently, is recorded as soon as it is received, and the same would apply to the treatment of goods bought and sold both in businesses and individuals.

The recording of data regarding all the incomes received is followed by a summary of data which is sometimes called data classification.

Accounting income, therefore, arrives at a consequence of these summaries, through which it will be possible to work out how much profit or loss has been made by an individual or business in a particular period.
Accounting income explicitly shows what resources are owned by the businesses and what is owed by it on the closing date of the period.
Through accounting income, it is possible for people who are skilled in accounting and are able to communicate accounting information to tell whether or not the business is performing well financially and to ascertain the strengths and weaknesses of the business.
Accounting income is therefore arrived at after all the data concerning sources and application of funds have been recorded, classified, summarized, and eventually communicated to those concerned.

It is impossible to arrive at the accounting income without going through the accounting equation. i.e. adding up what the accounting records say belongs to the business and deducting what they say the business owes. This gives us the accounting income which essentially shows what an individual or a business is worth according to those accounting records.
The accounting income, therefore, takes into account the fact that no business will be set up to start trading in the absence of recourses which in most cases are supplied by the owner of the business.
In an accounting sense, the amount of resources supplied by the owner is called Capital and the actual resources are then in the business are called assets

Usually, it is not only the owner of the business supplying resources, but other people swell other than the owner. The amounts owing to these other people for their assets in the business is called liabilities

Accounting income therefore can be called the owner‘s equity or net worth, since it comprises of the funds invested in the business by the owner plus any profits retained for use in the business less any share of profit paid out of the business to the owner. The following is an illustration of a balance sheet.
Institutions of all kinds prepare income statements even governments of Government bodies prepare such statements so as to determine the financial position or health of such an organization. This can also be used to compare the financial position of an organization's government between one year and another.
Such statement (income) depicts the relationship between current assets and current liabilities. The extent to which expenditures affects one's income position
ECONOMIC INCOME CONCEPT
Economics is both a science and an art, developed on the pedestal of scarcity and choice principle i.e. resources are scarce and human wants are unlimited, so we have to make economically rational choices to satisfy our unlimited wants.
Economic income generally emanates from the overall summary of economic activities in life by economics as a subject i.e. the four important processes of production, distribution, consumption, and exchange of goods and services.
For any production activity to take place, the factors of production must be employed i.e. land, labour, capital and entrepreneurship.
These factors of production are owned by households and hired by firms to produce goods and services which are in turn sold back to households
These factors of production are also called economic resources, which must be employed to generate economic incomes.
The economic resources incomes earned by land, labour, capital and entrepreneurship are rent, salaries and wages, interest and profits respectively
Because resources are scarce, choices have to be made so that their consumers can maximize, utility and producers can maximize profits.