The Relationship Between Accounting Profit and Economic Income

Abstract

The reliance on economic concepts, most notably economic income, for the measurement of profit in financial accounting is misplaced. This paper explores the concept of economic income, contrasting it with the concept of profit in the conventional accounting model. The concept of individual economic income cannot be used for measurement of profit for a past period as the concept is based on the capitalisation of expectations and excludes "separate but correlated" concepts of profit and capital needed for capital maintenance. The relationship between accounting profit and economic income AbstractThe ascendancy of economic concepts, most notably economic income, and reliance on them for the measurement of profit in financial accounting is misplaced. Schipper and Vincent (2003) and Justice Owen of the HIH Royal Commission provide recent examples of the dominance of economic ideas. This paper explores the concept of economic income, contrasting it with the concept of profit of the conventional accounting model.As Kaldor (1955) has shown, the Hicksian concept of individual economic income cannot be used for measurement of profit for a past period as the concept is based on the capitalisation of expectations, and excludes "separate but correlated" concepts of profit and capital, needed for capital maintenance. The Alexander/Solomons (1962) concept of variable income allowing for uncertainty is unable to escape the limitations of capitalised expectations. Attempts to develop support for a concept of current income from the economic model are also found wanting.Acceptance of these conclusions has implications for identifying relevant criteria in conceptual frameworks to guide the setting of accounting standards.

Managing Reputation in MNEs through Intangible Liabilities

“…This validates H2, due to the fact that those variables are a consequence of management decisions. This is partially aligned with the results included in [13][14][15][16]41,58].…”

“…This result validates H1, what implies that the management style really impacts on reputation perceived by stakeholders. This is aligned with other studies on intangible liabilities [14] The second constructor is formed by two variables: the first financial synthetic variable constructed through the factor relationship among assets, liabilities and shareholders' equity, coming from the basic accounting equation and the relationship between economic resources and financing sources The second synthetic financial one is constructed through the factor relationship of market capitalization, revenue, book value and tangible assets, as it is pointed out in Ryan [13]. This validates H2, due to the fact that those variables are a consequence of management decisions.…”

“…We have also considered the main financial figures relating to these companies defined by market capitalization, net profit, sales, EBITDA (Earnings before interest, taxes, depreciation, and amortisation), price-to-book value, total assets, total tangible assets, total debt and total equity. Theses variables have been considered useful for this kind of study in similar works [11][12][13][14][15][16][17][18][19].…”

Improvement of accounting of financial results for urban transport enterprises

“…Проблеми організації та методики обліку фінансових результатів розглянуті в працях провідних вітчизняних та зарубіжних вчених [1][2][3][4][5][6][7][8][9][10][11][12][13][14][15][16][17].…”

Financial accounting reform: the need for a 'back to basics' approach for profit measurement and wealth measurement

“…Economic income is unsuited for this task (see, for example, Kaldor, 1955;Shwayder, 1967;Ryan, 1970;Barton, 1974;Rayman, 2006;Ryan, 2007). Nor are the appeals to 'economic reality', or 'economic substance' convincing in the absence of agreement on the meaning of such terms.…”