BASIC CONCEPTS OF INCOME: MEASUREMENT AND RECOGNITION

BASIC CONCEPTS OF INCOME: MEASUREMENT AND RECOGNITION


The main objective of this concept is to identify various attributes of income from taxation standpoint. The term earnings is already known by the public, even by those who do not earn even. Two major problems concerning the determination of the amount of income, namely:

understanding or definition of income itself
measurement methods

The concept of economic

Economists define income as the amount (of goods and services) which in a certain time can be consumed by an entity, without leading to a reduction of capital. Economists use the capital maintenance approach (equity or capital maintenance approach) in determining the income of an entity in a period.

Income = (Capital End) - (Initial Capital), or
Income = (Consumption Value of Goods / Services) + / - (Change Capital)

With the approach of equity, the size of income within a period determined by comparing the total value or market price (fair market value) of capital or net assets at the end and beginning of the period involved (except from the deposit and withdrawal of capital). Income is measured based on the increase (or decrease) in net worth or capital owned by an entity plus the value (market price) of goods or services consumed in a period.

Thus, according to the economic concept of income is equal to the amount of value (market price) of goods or services that are actually consumed by an entity plus the increase and / or reduced decline in the value of goods or services that can or are willing to be consumed at a later date or in the period- next period.

Economic concept of income underscores the value of goods and / or services that can be consumed or consumption ability of an entity. Income is measured based on the ability of an entity to mengkonsumsikan goods and services, which often also referred to as purchasing power (purchasing power) or real income (real income). Three fundamental aspects in the economic concept of income:

Economic concept of income is a concept that is very wide-ranging.
Economic concept of income includes gains and losses, whether or not you have already realized (realized and unrealized gains and losses).
Economic concept of income required for consideration of the effect or influence the price level changes, declining purchasing power of money or inflation.

In measuring changes in value, economists use approaches or points of view on current call perspective, and therefore emphasizes the value now. Meanwhile, the value or historical price is considered less relevant. The main problem using the present value as the basis of measurement is that the present value is subjective, especially if no or no available market of goods or services that are needed to confirm these prices.

Changes (increase or decrease in value) of a product or service that is measured not based on actual transaction occurred is called profit or earnings that have not been realized (unrealized gains) or losses that are not actually happen (unrealized loss), and therefore worthy of questionable objectivity .

The emphasis of purchasing power, demand should also consider the effects of inflation (decline in the purchasing power of money) as one factor adjustments in income measurement. Increase the value of goods and services solely caused by changes in the purchasing power of money (in this case a decrease) can not be regarded as income, because the increase in value was not followed by increased ability to consume goods or services. Therefore, income in addition to the economic ability of an entity, should be measured based on the value of the rupiah konstan.Untuk, it is necessary to an index (the value of monetary units) at the time, called the base year price level or base period. The current value of the rupiah should be converted to a constant value of the rupiah price index, based on year basis. According to economic concepts, increase or decrease the value of goods or services as income or loss (in the sense of unrealized gains or losses) based on the calculation formula as follows:

Income (Increase Value of Shares) = (Value of Shares End of Year) - (Value of Shares Beginning of Year)
Losses (Impairment of Shares) = (Value of Stock at Beginning of Year) - (Value of Shares End of Year)

Accounting Concepts

The accountants' approach to the transaction (transaction approach) and the concept of exchange rates (exchange price) as the basis for income measurement. The main reason for the use of approach and thus the price is because the transaction actually happens and the exchange price is objective and verifiable truth. Approach transaction and exchange rates as the basis for income measurement is not without weaknesses or limitations. One disadvantage of using the concept of exchange rates is because the income is measured only by the number of absolute dollars, without considering that the possibility of changes in price levels or decline in purchasing power / inflation.

An income, including gains are considered not yet acquired or has not been realized up to the income and / or benefits may be associated with a particular transaction or event that could lead to the emergence of income and / or profits. That is, services must be provided or goods must be sold, transferred, exchanged, or converted into other goods or services in advance; before a number of income and / or gains deemed to have gained (earned), realized (realized), or can be realized ( realizable). Concepts related to the current recognition of income and / or similar benefits by the accountant or in accounting is often referred to as a concept or principle of realization of income.

In essence, income is equal to the total value of goods and services consumed in a period plus the increase in value of property or capital in the period concerned. However, in measuring the change in net worth or capital accounting concepts using the exchange price (historical cost or acquisition value and not the value or the current price or current value). Therefore, the exchange price (historical cost or acquisition value) does not change as a result of the passage of time, then no change in values ​​that need to be recognized or recorded until the occurrence of a transaction at a later date. As a result, according to the accounting concept does not recognize unrealized gains as a component of income. But on the contrary, according to accounting concepts; losses are likely to occur and have to be determined amount in many cases to be recognized.

Experience relatively high inflation rates in some developed countries, has led some accountants to rethink the possibility diaplikasikannya accounting models to consider changing the price level (current cost accounting model, the general price level accounting models, replacement cost accounting model), which consequently should recognize unrealized gains as a component of income. But in general, the accountants remain adamant to not move from the accounting model based on historical prices (historical cost accounting model), which does not recognize unrealized gains as a component of income.

Broadly speaking, the difference between accounting concepts with economic concepts related to income can be recognized as follows. According to economic concepts, income includes all gains and losses; from any source, which in the measurement or determination of the amount should consider the effect of price level changes. Medium according to accounting concepts, income includes only realized gains and all losses (including those that have not actually happen but most likely will happen); that in the measurement or determination of the amount is not necessary to consider the effect of price level changes.

Realization Principle and Income Recognition

It is recognized that in general, the concept of income under the Income Tax Act is closer than the concept of economic accounting concepts.