Question

Distinguish between the accounting concept and economic concept of income measurement.Distinguish between the accounting concept and economic concept of income measurement.

Answer 1

Accounting income included all the realized income and losses, i,e., it only includes the transactions which are complete and the cash has changed hands, whereas economic income inludes both realized and unrealized income and losses.

When a transaction is completed, the gains and losses are considered realized. Until the transaction is completed, any gains or lossed related to that transaction are considered unrealized. Unrealized gains or losses are also called paper gain or losses because the nominal value of the asset or liability has changed but the cash has not actually changed hands.

Accounting income or loss does not include unrealized gains or losses due to principle of conservatism, which states when faced with unceratinity one should alwayts choose the option which is least likely to overstate inome.

One exception to this rule to accounting income is marking to market. It is allowed to include unreliazed gains or losses in certain financial instruments by marking to market (valuing them based on their fair value instead of historical or amortized cost).

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