Accounting vs Economic Income

Accounting vs. Economic Income Abstract This paper explores further into two different peer reviewed articles, and one chapter of an accounting book. These articles express the dynamics of accounting and its perspectives. It also equates for how they are determined and the usefulness of the income based on changes in the value of credits and liabilities. In addition, it expresses the need for education in both forms of income, and specific training required to truly understand the differences.
Keywords:Accounting, Investments, Income, Assets, Liabilities Accounting versus Economic Income Introduction Accounting income and economic income may sound the same, but they vary greatly. Knowing the correct terminology is the mark of a true professional. (Kida & Hicks, 1982) There are several definitions and several different ways to approach the topic, but altogether they establish a better understanding. In accounting income and economic income there is more to them, than just definitions.
There should be a clear understanding and precise knowledge of the two. Summary Economic income represents an increase in the command over goods and services, or as economists refer to it as a measurement of “better-offness” (Walther, 2010). The Hicks approach addresses economic income is a change in wealth. This is simplified by a consumption of withdrawals by owners and savings, which constitute changes in an owner’s wealth. (Lamberg, 2002) Both interpretations of the economic income are very similar, and rely on wealth. In economics, value and income concepts are thought of in terms of theoretical concepts. ” (Kida & Hicks, 1982) Accounting income can be defined per word. Where “accounting measurements tend to be based on historical cost determined by reference to an exchange transaction with another party (such as a purchase or sale) and income represents “revenues” minus “expenses” as determined by reference to those transactions or events. ” (Walther, 2010) The FASB (Financial Accounting Standards Board) approach to accounting income is revenues, plus ains, minus losses, and minus expenses, but the IASC (International Accounting Standards Committee) refers to accounting income as revenues plus gains. (Lamberg, 2002) Several different approaches to the accounting income, but in general they are all alike. “The concept of income for accounting purposes has been traditionally based on a set of rules and regulations utilizing an historical cost approach. ” (Kida & Hicks, 1982) In order to see if students in college could really understand the differences in the two, a study was done. The purpose of this study was to test for income and value concepts to trained students in accounting and those not trained. ” (Kida & Hicks, 1982) The original hypothesis of this test was the students without the accounting education would tend to leer toward and economic approach or value based accounting system where income is viewed as a change in wealth, and the students with the knowledge and understanding would recognize the accounting procedural approach closely related to the historical cost convention. Kida & Hicks, 1982) A ten question multiple choice test was given out to 438 students at several universities, 206 with accounting training and 232 without any accounting knowledge. The original hypothesis was confirmed. The students without any accounting knowledge generally leered to an economic standpoint, and thought there answers were in a justified manner. “It appears that the students often become so adept at learning specific rules and regulations of accounting procedure that they overlook the more global issue of just what it is they are measuring. (Kida & Hicks, 1982) Students need an appreciation of the dynamics of accounting. (Lamberg, 2002) Conclusion In conclusion, economic income is basically about wealth, accounting income is mainly based more on how everyone determines the status of a company’s financial status. Accounting and economic knowledge is very useful. It continues to grow more and more in depth and knowledge is needed for all students in order to succeed in the business world. In today’s colleges, economic income concepts with the accounting procedural approach in both economics and accounting courses need to be implemented. In addition, it may be desirable to require an advanced economics course for accounting majors which reemphasizes the theoretical value based concepts. ” (Kida & Hicks, 1982) References Kida, T. , & Hicks, D. (1982). Economic versus Accounting Income: The Impact of Education on students concepts. Journal of Economic Education, EBSCO Host acessed August 2010 , 40-46. Lamberg, E. (2002). Economic versus Accounting Income. Business Source Complete Database , 30-34. Walther, L. (2010). Chapter 3 Income Measurement (27-44). Retrieved from Principles of Accounting: http://www. principlesofaccounting. com/pdf/Chapter%203id. v. 070107. pdf