Accounting income definition

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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 shows the results of all operational and financial activities engaged in by a business.

How to Calculate Accounting Income

The steps used to calculate accounting income are as follows:

  1. Determine total revenue. This includes all income earned from the business's primary activities (e.g., sales of goods or services), plus non-operating income (such as interest income or rental income).

  2. Identify total expenses. This includes all operating expenses (e.g., cost of goods sold, wages, rent, utilities, and advertising), as well as all non-operating expenses (e.g., interest expense, depreciation, or losses from asset disposals).

  3. Adjust for accruals. Revenue is recognized when earned, not necessarily when cash is received. Also, expenses are recognized when incurred, not necessarily when cash is paid.

  4. Subtract expenses from revenue. The result is accounting income.

What Affects Accounting Income?

Accounting income is impacted by any transaction that alters the revenue or expenses of a reporting entity. This is because accounting income is at the bottom line of a firm’s income statement, and every other income statement change flows downhill into it. The nature of these transactions will vary, depending on the accounting framework being used. For example, a transaction may be allowed under the Generally Accepted Accounting Principles Framework, but disallowed under the International Financial Reporting Standards framework. Thus, the accounting framework being used will have an impact on accounting income.

The Difference Between Accounting Income and Gross Income

Accounting income reveals the net profits generated by a business after all expenses have been accounting for, while gross income only reveals the difference between revenues and the cost of goods sold; gross income does not include the effects of selling, general and administrative expenses.

Terms Similar to Accounting Income

Accounting income is also known as net income.