Definition:
Accounting income is the net profit or loss of a business as reported on its income statement. It’s calculated by subtracting total expenses from total revenues.
Key components of accounting income:
- Revenues: These are the inflows of assets or settlements of liabilities from delivering goods or services.
- Expenses: These are the outflows of assets or incurrences of liabilities in the process of generating revenue.
Why is accounting income important?
- Financial performance: It measures a company’s profitability and overall financial health.
- Investment decisions: Investors use accounting income to assess a company’s investment potential.
- Taxation: Accounting income is often used as the basis for calculating taxable income.
- Management decisions: It provides information for making decisions about operations, investments, and financing.
It’s important to note that accounting income may not always reflect a company’s true economic performance due to factors such as accrual accounting and estimates. However, it remains a crucial metric for understanding a company’s financial situation.
