Chapter One
Introduction
1.1 Background of the Study
Business are in the business of earning income. Their activities do not necessarily coincide with standard periods of time, but the business environment requires that firms report income or loss regularly. For example, owners must receive income reports every year, and the government requires corporations to pay taxes on annual income. Within the business, management uses financial statements – prepared every month or more oen to monitor performance. Because of these demands, a primary objective of accounting is measuring net income in accordance with generally accepted accounting principles. Readers of financial reports who are familiar with these principles understand how the accountants defined net income and are aware of it’s strengths and weaknesses as a measurement of company performance. Business rely on profit to buy new inventory, expand operations and finance product development. Without profit, business would stagnate and risk losing its market share to other competitors. Its share price will fall, which means its cannot rise as much money with share sales and cannot borrow from banks as easily. The goal of many businesses is to generate a profit for owners, employees and shareholders. It is therefore imperative at this point to illustrate the definition of income measurement. From accountant’s perspective, income is defined as the residual portion of revenue which is the result of subtracting total revenues generated from the total expenses incurred by the company during the revenue generation phase. An economist though would beg to dier, by defining income in terms of residual expected cash flows available from consumption, aer dividend and equity appreciation has been taken into account although the accountants and the economists view of the income concepts dier, in that one deals with historical values and the other in future expected cash flows, its importance is of vital use. Eectively, management has been entrusted with funds from various sources (shareholders, financial etc) to appreciate its value, and as such. Income is an eective indicator of measuring that. Management’s stewardship on its operating eectiveness of working capital may be best monitored by charting a company’s income pattern. From managerial point of view, income will aid in high lighting the disparities between actual and predicted performance targets. As for governments, income is a bench mark of a company’s asset appreciation for a given period, that they may apply taxes on. However, the importance of income measurement cannot be over emphasized. Explicte survey has revealed that ther is growing awareness of importance of income measurement and its influence on the success of a corporate organization. Based on the above general promises of our discussion, income measurement requires expert skillful in determining not income as its effectiveness make an esteem corporate organization prosperous and successful as a result of the impact of income measurement on a business, this is to assess the income concept measurement in corporate profitability.
1.2 Statement of the Problem
Corporate organization will be safe, sound and healthy if they measure their income efficiently and periodically. These will enable investors to understand the financial health of these business organization. Today, there are many business failures as a result of poor measurement of income some corporate organization has gone bankrupt because of poor measurement of business income. If we ignore this problems, many corporate organization will go out of business. There will be how investment, unemployment will rise, government income will reduce that is tax paid to government will drop. In the light of all these problems and the fact that there is the awareness of the need for income measurement. This study focuses on looking at the ways and methods of measuring income. It will also highlight the need to study the accounting period issue, the continuity issue and the matching issue. Moreover, income statements, net income will be discussed. Finally, the basic elements of revenue recognition, basic elements of expenses recognition, the adjusting process and related entities and accrual-versus cash-basis accounting will be looked into.