What is Accounting Income?

What is Accounting Income?

Accounting income is profitability that has been compiled using the accrual basis of accounting. In general, accounting income is the change in net assets during a reporting period, excluding any receipts from or disbursements to owners. It is also calculated as revenues minus all expenses.

Accounting income equals total revenues minus total expenses, but a variety of indicators, including gross income and operating income, make it into a company’s profitability line. Gross income equals total sales revenue minus cost of goods sold, also referred to as inventory outlays or material expense. Gross income minus operating expenses, including things like salaries, rent and insurance, equals operating income.

When you subtract non-operating outlays — such as the one-time renovation of a production plant after meteorological damage — you get taxable income, which becomes net income after settling fiscal debts. In a financial dictionary, the terms ” accounting income” and “net income” are identical.

How is Accounting Income Calculated?

As part of the income statement, accounting income is calculated starting with sales revenue. This is the amount of revenue earned through the sale of goods or services. From that amount, direct costs for producing the goods or providing the services are deducted to find gross profit.

From here, most indirect expenses are deducted to find EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). The indirect expenses include but are not limited to, indirect labor costs, marketing costs, rent, professional fees, and meals and entertainment. Depreciation, amortization, interest, and taxes are deducted after the EBITDA line item.

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From EBITDA, companies will often deduct Depreciation and Amortization to find EBIT. EBIT less Interest Expenses results in EBT, which stands for Earnings Before Tax. EBT is also sometimes known as Taxable Income, although there are some cases where EBT and Taxable Income differ, due to the type of deductions and tax liabilities that apply to a given company.

Finally, when taxes are deducted from EBT, we arrive at accounting or net income.

What Affects Accounting Income?

Accounting income is the bottom line in the income statement and is therefore affected by every other line item appearing before it. In that sense, the amount that a company can declare will be a function of the revenue realization and expense matching rules that apply to it.

In most cases, accounting income is tied to the rules of accrual accounting. It means that accountants will often follow IFRS or GAAP rules to derive the figure, although such rules may differ between different countries.