Information about Income

Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business.

Internationally, the accounting term income is synonymous to term revenue minus expenses. The International Accounting Standards Board uses this definition:

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. [F.70] (IFRS Framework)

Meaning in economics and use in economic theory

In economics, factor income is the flow (that is, measured per unit of time) of revenue accruing to a person or nation from labor services and from ownership of land and capital.

In consumer theory 'income' is another name for the "budget constraint," an amount Y to be spent on different goods x and y in quantities x and y at prices Px and Py. The basic equation for this is

Y = Px • x + Py • y.

This equation implies two things. First buying one more unit of good x implies buying Px/Py less units of good y. So, Px/Py is the relative price of a unit of x as to the number of units given up in y. Second, if the price of x falls for a fixed Y, then its relative price falls. The usual hypothesis is that the quantity demanded of x would increase at the lower price, the law of demand. The generalization to more than two goods consists of modelling y as a composite good.

The theoretical generalization to more than one period is a multi-period wealth and income constraint. For example the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multiperiod case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis.

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 individuals, corporations, and government in the economy. For more information see measures of national income and output.

Income in Philosophy and Ethics

Throughout history, many scholars have written about the impact of income growth on morality and society. In particular, a number of scholars have come to the conclusion that material progress and prosperity, as manifested in continuous income growth at both individual and national level, provide the indispensable foundation for sustaining any kind of morality. This argument was explicitly given by Adam Smith in his Theory of Moral Sentiments, and has more recently been developed in depth by Harvard economists Benjamin Friedman in his well-acclaimed recent book The Moral Consequences of Economic Growth.

Meaning within U.S. accountancy

In U.S. business and financial accounting, the term 'income' is also synonymous with revenue; however, many people use it as shorthand for net income, which is the amount of money that a company earns after covering all of its costs.

Net income is also called 'net profit'. It is calculated as follows:

1. The gross income or gross revenue is tabulated.
2. Where applicable, the cost of goods sold or cost of operations figure is subtracted from the gross income to yield the gross profit.
3. All expenses other the COGS or COO are subsequently subtracted from the gross profit to yield the net profit or net income - or, if a negative number, the net loss (usually written in parentheses). More commonly, this is called "Net Income (or Loss) Before Taxes".
4. Taxes are then subtracted from the pre-tax net income to give a final net income or net profit (or net loss) figure.


Net income or net profit which is not expended to shareholders in the form of dividends becomes part of retained earnings.

All public companies are required to provide financial statements on a quarterly basis, and the income statement of income is one of the most important of these. 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.

See also

• Comprehensive income
• Distribution (economics)
• Income statement
• Income tax
• Income trust
• Income inequality metrics
• Per capita
• Per capita income
• Poverty line
• Private income
• Profit
• Remuneration
• Six figure income
• Wealth (economics)
• Residual income

References

• D. Usher (1987). "real income," The , v. 4, pp. 104-05

External links

• Markets & Stocks: Investor Research Center - Earnings Warnings
• http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/
• CBSalary — Careerbuilder's Free Salary Calculator
• US Corporate Earnings Calendar