Accounting Income Definition

Accounting Income Definition

See Also:
Accounting Income vs. Economic Income
Accrual Based Accounting
Financial Ratios
Comprehensive Income
Financial Accounting Standards Board (FASB)

Accounting Income Definition

The accounting income definition is an estimate of performance in the operations of a company. It is influenced by financing and investing decisions. Accounting income or loss generally recognizes realized gains and losses, and does not recognize unrealized gains and losses.

Realized Accounting Income

For income to be realized, it must be related to actual business transactions; in effect, the cash you have must increase or decrease. A change in market value rather than cash received is not an accounting income; it is an economic income. Economic income or loss recognizes all gains and losses whether realized or unrealized.
Whether accounting realizes a gain/loss or not, it is central to the accounting profits definition. It becomes an income suitable for accounting when a gain or loss is realized. The accounting value for this asset is generally listed at the historical value of the transaction selling it. When a gain or loss is unrealized, you may or may not be account for it in general. This depends on the placement of the gaining or losing asset in the balance sheet. Despite that this gain or loss may be accounted for, the fact that it is unrealized makes it an economic income or loss. The accrual accounting income statement will look very different from the fair value accounting statement.
Essentially, accounting income defined the ways companies evaluate their cash standing after the sale of an asset. This, once again, differs from economic income in that economic income is the way for companies to account for changes in the value of a given asset in the market. The deciding factor is whether or not a transaction takes place.

Accounting income is a critical part of knowing your economics. If you’re struggling to identify your company’s economics, download the free Know Your Economics Worksheet.

[button link=”” bg_color=”#eb6500″]Download The Know Your Economics Worksheet[/button]

Accounting Conservatism

Accounting income or loss does not incorporate unrealized gains and losses because of the convention of accounting conservatism. When accountants confront uncertainty in regard to method or procedure, they conventionally choose the option that is least likely to overstate income or asset value. In the case of realized versus unrealized gains and losses, it is more conservative from an accounting perspective to exclude increases or decreases in value that have not yet been actualized.

Accounting Profit Example

A perfect example of accounting profit occurs every day in the stock market. Investco is a company which invests in market securities. Investco currently owns a share of Google stock worth $600. The following week Investco notices the share of Google stock has increased in value from $600 to $650. Investco sells this share of Google stock and receives $650 from the sale of one share of Google stock. What is Investco’s accounting income? Accounting profit and economic profit demonstrate two different principles.
Investco experienced an accounting income: their share of Google stock was sold for $50 more than it was initially worth. Thus, Investco has a realized accounting gain of $50. The accounting income calculation is $650 – $600 = $50.
If Investco never sold the share of Google stock, then it would have experienced an economic gain of $50. Investco did not have a transaction in which cash increased by $50.

Accounting Income vs Taxable Income

The treatment of accounting income and taxable income is different. The inclusion of tax accounting confuses the matter. Under GAAP, income and expenses are matched to the period in which they are incurred. As a result, the accounting income received incurred on the specific day it sold the share of Google stock. With tax accounting, however, match taxable income and expenses to the period upon which the I.R.S. decides. Investco may or may not incur an increase in taxable income based on I.R.S. regulations. It has incurred this potential increase in the accounting period the I.R.S. chooses. Do not consider accounting income under GAAP an accounting profit under I.R.S. tax rules. Want to check if your unit economics are sound?  Download your free guide here.
accounting income definition, accounting income
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

accounting income definition, accounting income


The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »


Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022



Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®


September 12-15th 2022