Misplaced Pages

Revision as of 00:07, 14 February 2004

Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. For example, most individuals' income is the cash they receive from their regular paychecks.

                                                                                                                   In business and accounting, income (also known as profit or earnings) is, more specifically, the amount of money that a company earns after considering all its costs.  To calculate a company's income, it starts with its amount of revenue, deducts all costs, including depreciation, and the number that results is its income, which may be a negative number.  This money either might be used to pay the owners (the shareholders) a dividend or might be reinvested back into the company.

In corporations, income is not exactly synonymous with the way most people think of profit. In the minds of most people, if a person selling lemonade that costs him 3 dollars and which he sells for 5 dollars, he makes a profit of 2 dollars which he keeps himself. Lets say that he decided to make his business a corporation and sell all of it, but became CEO. The next year he sells 5 dollars worth of lemonade, his salary (what he gets paid by the company) is one dollar, and the cost per lemonade is still 3 dollars. Now the income is the 1 dollar left over. Critics of the concept of a corporation says that in practise they must still pay the guy 2 dollars, the same as he would make if he fully owned the company, otherwise he would leave. This would force the company to raise costs or introduce other means to keep his pay the same, and critics argue that this is a fatal flaw in the concept of a publicly traded corporation.

All public companies are required to provide financial statements on a quarterly basis. The statement of income is an important part of this. Some companies also provide a more rosy financial report of their income, with pro forma reporting, or, EBITDA reporting. Pro forma income is an estimate of how much the company would have earned without including the negative effect of exceptional "one-time events", supposedly in order to show investors how much money the company would have made under normal circumstances if these exceptional, one-time events had not occurred. Critics charge that, in most cases, the "one-time events" are normal business events, such as an acquisition of another company or a write off of a cancelled project or division, and that pro forma reporting is an attempt to mislead investors by painting a rosy financial picture. Besides that, when discussing results with analysts and shareholders CEOs and CFOs have a tendency to do even more "hypothetical accounting". EBITDA stands for "earnings before interest, taxes, depreciation, and amortisation", and is also criticised for being an attempt to mislead investors. Warren Buffett has criticised EBITDA reporting, famously asking, "Does management think the tooth fairy pays for capital expenditures?"

In economics, income is the constraint to unlimited consumer purchases. Consumers can purchase a limited number of goods. The basic equation for this is I = Px*x+Py*y where Px is the price of good x, x is the quantity of good x, and I is the income (Py and y are similar to Px and x). If you need to examine more than two goods, you can add more on. This equation tells us two things. First, if you buy one more of good x, you get Px/Py less of good y. Here, Px/Py is known as the rate of substitution. Secondly, if the price of x changes, then the rate of substitution changes. This causes demand curves to slope down.

The distribution of income within a society can be measured by the Lorenz curve and the Gini coefficient.

National income, measured by statistics such as the Net National Income (NNI), measures the total income of all individuals in the economy. For more information see measures of national income.

Also see: Poverty level