Chat with us, powered by LiveChat Concepts of Income | paledu.org
  

After completing the assigned readings, prepare a 2-3 page, double-spaced paper to explain the two concepts of income (i.e. economic and accounting) in your own words. What approach do you think is appropriate for use in financial statements? Support your opinion with a rational argument.

KEITH SHWAYDER

A Critique of Economic Income as an
Accounting Concept *

Economic income as defined in Hicks’s influential book. Value and Capital,^ has
achieved wide acceptance in accounting literature—especially since the publication
of Alexander’s monograph. Income Measurement in a Dynamic Economy.’^
Hansen, for example, enthusiastically endorses this concept: ‘Profit as capital
interest, . . . may be characterized as a theoretically complete concept, which is
superior to other concepts of profit as a definition and as a guide point for an ideal
practical procedure.’^ Solomons is equally sanguine: ‘. . . growth in present value
. . . alone appears to be significant; and since it seems to carry out the function
generally attributed to income, growth in present value must be what we had
better understand income to mean. The concept of income to which we have
been led corresponds, of course, to Hicks’s definition of income.’* Goldberg
questions this acceptance: ‘. . . the definition of income as given by J. R. Hicks
. . . has been widely adopted both implicitly and explicitly, and often without
question, in accounting and economic writing, even though Hicks himself pointed
out its impracticability.’^

Economic income is generally defended as an ideal theoretical concept which is
impractical to implement because of the difficulty in an uncertain world of
measuring future cash flows. Not only is economic income an impractical concept,
but it is also, in my opinion, an unsound theoretical model for accounting income
measurements. In defending this opinion, I will analyse five situations where the

1. J. R. Hicks, Value and Capital, Oxford University Press, 1939, p 172.
2. Sidney Alexander, ‘Income Measurement in a Dynamic Economy’, Five Monographs in
Business Income, New York, American Institute of Certified Public Accountants, 1948, as
revised by David Solomons, in Studies in Accounting Theory, W. T. Baxter and Sidney
Davidson (eds), Homewood, Illinois, Richard D. Irwin, Inc, 1962.
3. Palle Hansen, The Accounting Concept of Profit, Amsterdam, North-Holland Publishing
Company, 1962, p 19.
4. David Solomons, ‘Economic and Accounting Concepts of Income’, The Accounting Review,
July 1961, p 375.
5. Louis Goldberg, An Inquiry into the Nature of Accounting, American Accounting
Association, 1965, p 247.

* The writer wishes to thank Professors Yuji Ijiri and Charles Horngren of Stanford
University for their many helpful comments and suggestions.

KEITH SHWAYDER is Instructor in Accounting, Graduate School of Business, University
of Chicago.

23

ABACUS

economic income method allocates income to accounting periods in a manner
which violates our intuitive notions concerning periodic income:

1. A firm with a single venture.
2. A long lived firm.
3. A firm where the subjective rate of interest approaches zero.
4. A fi

Accelerat ing the world’s research.

David Solomons

Fabrício Costa

Related papers Download a PDF Pack of the best related papers 

An Empirical Evaluation of Accounting Income Numbers

Author(s): Ray Ball and Philip Brown

Source: Journal of Accounting Research , Autumn, 1968, Vol. 6, No. 2 (Autumn, 1968),
pp. 159-178

Published by: Wiley on behalf of Accounting Research Center, Booth School of
Business, University of Chicago

Stable URL: http://www.jstor.com/stable/2490232

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

Terms and Conditions of Use

and Wiley are collaborating with JSTOR to digitize, preserve and extend access to Journal of
Accounting Research

This content downloaded from
������������173.89.208.153 on Tue, 23 Jun 2020 21:06:08 UTC�������������

All use subject to https://about.jstor.org/terms

An Empirical Evaluation of Accounting

Income Numbers

RAY BALL* and PHILIP BROWNt

Accounting theorists have generally evaluated the usefulness of account-
ing practices by the extent of their agreement with a particular analytic

model. The model may consist of only a few assertions or it may be a
rigorously developed argument. In each case, the method of evaluation has

been to compare existing practices with the more preferable practices im-
plied by the model or with some standard which the model implies all
practices should possess. The shortcoming of this method is that it ignores

a significant source of knowledge of the world, namely, the extent to which
the predictions of the model conform to observed behavior.

It is not enough to defend an analytical inquiry on the basis that its
assumptions are empirically supportable, for how is one to know that a
theory embraces all of the relevant supportable assumptions? And how does
one explain the predictive powers of propositions which are based on un-
verifiable assumptions such as the maximization of utility functions?
Further, how is one to resolve differences between propositions which arise
from considering different aspects of the world?

The limitations of a completely analytical approach to usefulness are il-
lustrated by the argument that income numbers cannot be defined sub-
stantively, that they lack “meaning” and are therefore of doubtful util

A Critical Analysis of Accounting Concepts of Income
Author(s): Norton M. Bedford
Source: The Accounting Review, Vol. 26, No. 4 (Oct., 1951), pp. 526-537
Published by: American Accounting Association
Stable URL: https://www.jstor.org/stable/242215
Accessed: 13-06-2020 15:40 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide

range of content in a trusted digital archive. We use information technology and tools to increase productivity and

facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

Terms and Conditions of Use

American Accounting Association is collaborating with JSTOR to digitize, preserve and
extend access to The Accounting Review

This content downloaded from 173.89.208.153 on Sat, 13 Jun 2020 15:40:58 UTC
All use subject to https://about.jstor.org/terms

A CRITICAL ANALYSIS OF ACCOUNTING
CONCEPTS OF INCOME

NORTON M. BEDFORD

Assistant Professor, Washington University

IN THE last two decades accountants
have made remarkable progress toward
a synthesis of accounting procedures.

Both the American Accounting Associa-
tion and the American Institute of Ac-
countants have contributed to this, gather-
ing together diverse practices into a some-
what cohesive body of acceptable account-
ing principles. While it will be contended
by some that the statements and bulletins
by the accounting groups are not at-
tempts to synthesize accounting pro-
cedures, a detailed examination reveals
that more than anything else such is their
nature. More often than not the formula-
tions may be viewed as a framework into
which prevailing accounting practices are
fitted. Of course, it is true that procedures
other than those used in practice have at
times been suggested, but such suggestions
appear to be attempts to reconcile different
views.

There has not been universal acceptance
of the principles and procedures set forth
by the two accounting groups but it ap-
pears that enough progress in this direc-
tion has been made to warrant an assump-
tion that their statements are representa-
tive of the views held by accountants.
Especially is this so if it is assumed that
the formulations are in the nature of syn-
theses of extant accounting practice. In
addition, the current interest in the con-
cept of income used by accountants makes
it appropriate to go along with the as-
sumptions and examine the concept of
income within the various formulations of
accounting principles and procedures.

The Matching Concept
Author(s): 1964 Concepts and Standards Research Study Committee–The Matching Concept
Source: The Accounting Review, Vol. 40, No. 2 (Apr., 1965), pp. 368-372
Published by: American Accounting Association
Stable URL: http://www.jstor.org/stable/242304
Accessed: 18-02-2017 13:01 UTC

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted

digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about

JSTOR, please contact [email protected]

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

Terms and Conditions of Use

American Accounting Association is collaborating with JSTOR to digitize, preserve and extend access to
The Accounting Review

This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 13:01:35 UTC
All use subject to http://about.jstor.org/terms

This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 13:01:35 UTC
All use subject to http://about.jstor.org/terms

This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 13:01:35 UTC
All use subject to http://about.jstor.org/terms

This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 13:01:35 UTC
All use subject to http://about.jstor.org/terms

This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 13:01:35 UTC
All use subject to http://about.jstor.org/terms

This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 13:01:35 UTC
All use subject to http://about.jstor.org/terms

  • Contents
    • image 1
    • image 2
    • image 3
    • image 4
    • image 5
  • Issue Table of Contents
    • Accounting Review, Vol. 40, No. 2, Apr., 1965
      • Front Matter [pp.488-493]
      • Challenges to the Accounting Profession [pp.299-311]
      • The Realization Concept [pp.312-322]
      • How Should We Interpret the Realization Concept? [pp.323-333]
      • Cash Movement: The Heart of Income Measurement [pp.334-337]
      • Internal Control — Its True Nature [pp.338-344]
      • Inventory Valuation and Management Decisions [pp.345-357]
      • The Entity Concept [pp.358-367]
      • The Matching Concept [pp.368-372]
      • Lease Capitalization and the Transaction Concept [pp.373-376]
      • Accounting for Business Combinations [pp.377-381]
      • International Accounting Practices [pp.382-385]
      • Whys and Hows of

        The Realization Concept
        Author(s): 1964 Concepts and Standards Research Study Committee–The Realization
        Concept
        Source: The Accounting Review, Vol. 40, No. 2 (Apr., 1965), pp. 312-322
        Published by: American Accounting Association
        Stable URL: http://www.jstor.org/stable/242298
        Accessed: 18-02-2017 12:59 UTC

        JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted

        digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about

        JSTOR, please contact [email protected]

        Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at

        Terms and Conditions of Use

        American Accounting Association is collaborating with JSTOR to digitize, preserve and extend access to
        The Accounting Review

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to http://about.jstor.org/terms

        This content downloaded from 129.22.124.87 on Sat, 18 Feb 2017 12:59:11 UTC
        All use subject to