Question

what are the approaches of earnings

Answer 1

THE APPROACHES OF EARNINGS ARE AS FOLLOWS:

APPROACH 1 - TRANSACTIONS APPROACH TO INCOME MEASUREMENT

The transactions approach in income measurement records changes in asset and liability valuations only as these are the results of transaction. The term transactions is used in wider sense and it includes both external transactions and internal transactions. External transactions relate to dealings with outside parties and Internal transactions arise due to use or conversion of assets within the firm.

In transaction appraoch, income is determined after recording revenues and expenses associated with external transactions. This approach has some advantages

1.It provides information about assets and liabilities existing at the end of a period.

2.The net income of a business can be classified in terms of products,customers which certainly provide more useful information to the management.

3. Income data can be collected for operations within the firm and external factors separately.

4. Different statements prepared under the transactions approach can be made to have linkage with each other. This enhances the fuller understanding and utility of data developed in this approach.

APPROACH 2 - ACTIVITIES APPROACH TO INCOME MEASUREMENT

The activities approach focuses on description of activities of a business enterprises rather than on transactions. In this approach, income is recognised when certain activities or event occur, income recoginition is not confined to the mere result of specific transaction.

Activities approach income facilitates the measurement of several concepts of income, which can be used for different purposes. It can be contended that income in case of production and sale of merchandise requires different valuations and predictions which may not be relevant while measuring income in case of purchase or sale of securities.