Measurement of Business Income | Meaning, Features, Methods and Objectives | Financial Accounting Notes | B.Com 1st Sem | CBCS Pattern

 Financial Accounting Notes
B.Com 1st Sem CBCS Pattern
Measurement of Business Income

Unit – 2: Business Income

Part A: Measurement of Business Income

Measuring of Business Income

Business is an economic activity, which is related with continuous and regular production and distribution of goods and services with a view to earn profit. In accounting, the term income refers to business income.  Business income can be defined as excess of revenue over expenses. Revenue means inflow of assets from business operations which result in an increase in the owner’s equity. The terms ‘expense’ refers to the amount incurred in the process of earning revenue. If revenue exceeds expenses, it would represent income or profit. If expenses exceed revenue, it would represent loss. Thus, Net Income (Profit/Loss) = Total Revenue-Total Expenses.

Features of Business income

Following are the main features of business income:

a)      Business income is based on the transactions (both external and internal) actually entered into the business enterprise.

b)      Business income always pertains to a given accounting period.

c)       Business income is based on the recognition and measurement of revenues.

d)      Business income requires the measurement of all business expenses in terms of historical cost.

e)      Business income is based on the principle of matching realized revenues of the period with corresponding relevant costs.

f)       Business income is the excess of the net worth of the business enterprise at the end of accounting period.

Procedure for Measurement of Business income

a)      First of all, accounting year i.e., period of 12 months for which income is to be calculated selected.

b)      After selection of the accounting year, revenue pertaining to it is identified. Realisation concept is followed in the identification of revenue.

c)       Then, expenses incurred to earn the revenue are identified. Only expenses relating to the relevant accounting year is to be taken into consideration.

d)      Excess of revenues over expenses represents profits and excess of expenses over revenues represent loss.

Methods of Measuring Business Income

Following are the methods of measuring business income:

a)      Net worth method:  As per this method, the net worth i.e. Capital of a business enterprise at the end of the accounting period is compared with the same at the beginning of the accounting period. If capital at the end of the year is more than the opening capital, there is a profit for the business enterprise or if capital in the beginning is more than the closing capital, there will be a loss.

b)      Matching Principle. Under this method, income of a business enterprise is determined by matching revenues and expenses pertaining to a given accounting period. This method is based on the income statement. For matching costs with revenues, first revenues are recognized and then costs are incurred for generating those revenues is recognized.

Objectives of Measurement of Business Income

a)      To measure of Managerial Efficiency.

b)      To measure the Creditworthiness or short term liquidity.

c)       To provide base for calculation of tax.

d)      To help in taking investments decisions.

e)      To assist in taking dividend decision.