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Income concepts for financial reporting



The word income is used indiscriminately with several quite different meanings. Webster defines income as “that gain or recurrent benefit (usually measured in money) which proceeds from labor, business or property” and also “revenues” or” receipts”. To the ordinary individual, income usually means receipt of money. Economists, however, are interested primarily in real income, which they think of as a flow of goods or services or as a flow of satisfactions of human wants.

The concept of business income and its measurement have received considerable attention in the last fifty years from both theories and practitioners in various disciplines. Yet, in spite of all the time and effort that have been devoted to it, there still remains largely unresolved the question as to what constitutes the most practically useful concept of business income and how it should be measured for various purposes.

The essence of any business organization is to make profit which remains its income for engaging in business activities over the year. Therefore, it is a serious task for the company to adopt a comprehensive way of measuring their income in relation to generally accepted accounting standards; hence Accountants and Economists are not left out in looking for more comprehensive ways of capturing income of business activities since income measurement is an important aspect of financial reporting worldwide including Nigeria.


Profit is generally seen as a basis for taxation, the determinant of the dividend payment policy, investment guidelines and decision –making and the element of prediction (Belkaoui, 1993). In Statement of Financial Accounting concepts (SFAC no1) states that earnings information is a component of the financial statements provided with the aim of helping to provide information to assess management performance, representative estimate earnings ability in the long term and assess risks in the investment or loan. Earnings in the conventional sense are the maximum value that can be divided or in consumption during the accounting period in which the state at the end of the period is still the same as in the beginning of the period.

Profit in accounting theory usually refers to the concept that the Financial Accounting Standard Board (FASB) called comprehensive income. Comprehensive income interpreted as an increase in net assets other than those resulting from transactions with owners. While earnings are profit which are accumulated during a period or an increase inequity or net assets of a company caused by operating activities and outside business activities for a certain period.

Both Accountants and Economists understand that the earning process occurs throughout the various stages of production, sales and final delivery of the product. However, the difficulty in measuring the precise rate at which this earnings process is taking place has accountant to conclude that income should normally be recognize only when it is fully realized. Realization generally implies that the enterprise producing the item has completed all of its obligations relating to the product and that collection of the resulting receivable is assured beyond reasonable doubt. For a very sound reason , Accountants have develop a reliable system of income recognition that is based on generally accepted accounting principles applied consistently from period to period. The interplay between recognition and realization generally means that values on the Statement of financial position are recognized only when realized through a Statement of income transactions.

In relation to The Financial Accounting Standard Board (FASB), Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstance from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners (Statement of Financial Accounting Concept No.6 (SFAC6).Comprehensive income results from (a) exchange transaction and other transfers between the enterprise and other entities that are not its owners (b) the enterprise’s productive efforts, and (c) price changes, causalities and other effects of interactions between the enterprise and the economic, legal, social, political and physical environment which it is a part (SFAC6 Paragraph74).

Comprehensive income result from revenue and gains, expenses and losses, which are classified according to business activities: operating income, non –operating income, price level changes. The income statement reports gains and losses at net instead of gross amounts because owners do not need information on the components of either peripheral of nonrecurring income items. Revenues and expenses are gross concepts whereas gains and losses are net concepts.

As matter of fact, this Term paper deals with the problem of income definition and measurement as well as its interpretation in financial reporting.

Having considered the above, one would see how relevant Income measurement is in financial reporting and rationale behind it. This will lead us to the point of considering various approaches to income measurement and how they are practiced in Nigeria.

The International Accounting Standards Board (IASB), conceptual framework, which was approved by IASC Board in 1989 and adopted by the IASB in 2001, takes the view:

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. Financial statement prepared for this purpose met the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effect of past events and do not necessarily provide non-financial information. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it.
To be continued tomorrow
•Ogunyinka wrote from Lagos

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