Definitions

income

profit sharing

System by which employees are paid a share of the profits of the business enterprise in which they are employed, in keeping with a plan outlined in advance. These payments, which may vary according to salary or wage, are in addition to regular earnings. Profit-sharing plans were probably first developed in France in the early 19th century as worker incentives. Today such plans are used by businesses in Western Europe, the U.S., and parts of Latin America. Profit shares may be distributed on a current or deferred basis or through some combination of the two. Under current distribution, profits are paid out to employees immediately in the form of cash or company stock. In deferred-payment plans, profit shares may be paid into a trust fund from which employees can draw annuities in later years.

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In business usage, the excess of total revenue over total cost during a specific period of time. In economics, profit is the excess over the returns to capital, land, and labour. Since these resources are measured by their opportunity costs, economic profit can be negative. There are various sources of profit: an innovator who introduces a new production technique can earn entrepreneurial profits; changes in consumer tastes may bring some firms windfall profits; or a firm may restrict output to prevent prices from falling to the level of costs (monopoly profit).

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Set of principles and methods used to measure a country's income and production. There are two ways of measuring national economic activity: the expenditure approach, which measures the money value of the total output of goods and services in a given period (usually a year); and the income approach, which measures the total income derived from economic activity after allowing for capital consumption. The most commonly used indicator of national output is the gross domestic product (GDP). National income may be derived from gross national product (GNP) by making allowances for certain non-income costs included in the GNP, such as indirect taxes, subsidies, and depreciation. National income thus calculated represents the aggregate income of the owners of the factors of production; it is the sum of wages, salaries, profits, interest, dividends, rent, and so on. The data accumulated for calculating the GDP and national income may be manipulated in various ways to show various relationships in the economy. Common uses of the data include breakdowns of GDP according to type of product, breakdowns of national income by type of income, and analyses of the sources of financing (e.g., personal savings, company funds, or national deficits).

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Levy imposed by public authority on the incomes of persons or corporations within its jurisdiction. In nations with an advanced system of private enterprise, income taxes represent the chief source of government revenue. Income tax levied on individuals or family units is known as personal income tax. In 1799 Britain enacted a general income tax to finance the Napoleonic Wars. In the U.S. an income tax was first tried during the Civil War; the Supreme Court held it to be constitutional in 1881 but declared another income tax unconstitutional in 1894. In 1913 the 16th Amendment to the Constitution made the personal income tax permanent. The fairness of personal income taxation is based on the premise that one's income is the best single index of one's ability to contribute to the support of the government; most personal income taxes are conceived on the theory that when people's financial circumstances differ, their tax liabilities should also differ. Thus U.S. income taxes are progressive taxes, falling more heavily on those who earn more money, and individual income tax deductions are allowed for items such as interest paid on home mortgage debt, unusual medical expenses, philanthropic contributions, and state and local income and property taxes. Enforcement has been facilitated by withholding the tax from wages and salaries. Seealso capital gains tax; capital levy; corporate income tax; regressive tax; sales tax; value-added tax.

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Portion of an individual's income over which the recipient has complete discretion. To assess disposable income, it is necessary to determine total income, including not only wages and salaries, interest and dividend payments, and business profits, but also transfer income such as social-security benefits, pensions, and alimony. Obligatory payments, including personal income taxes and compulsory social-insurance contributions, must be subtracted. Disposable income may be used for consumption or saving.

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Income, refers to consumption opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received... in a given period of time." For firms, income generally refers to net-profit: what remains of revenue after expenses have been subtracted. In the field of public economics, it may refer to the accumulation of both monetary and non-monetary consumption ability, the former being used as a proxy for total income.

The International Accounting Standards Board uses this definition:

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. [F.70] (IFRS Framework)

Meaning in economics and use in economic theory

In economics, factor income is the flow (that is, measured per unit of time) of revenue accruing to a person or nation from labor services and from ownership of land and capital.

In consumer theory 'income' is another name for the "budget constraint," an amount Y to be spent on different goods x and y in quantities x and y at prices Px and Py. The basic equation for this is

Y = Px • x + Py • y.
This equation implies two things. First buying one more unit of good x implies buying Px/Py less units of good y. So, Px/Py is the relative price of a unit of x as to the number of units given up in y. Second, if the price of x falls for a fixed Y, then its relative price falls. The usual hypothesis is that the quantity demanded of x would increase at the lower price, the law of demand. The generalization to more than two goods consists of modelling y as a composite good.

The theoretical generalization to more than one period is a multi-period wealth and income constraint. For example the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multi-period case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis.

Income inequality

Income inequality refers to the extent to which income is distributed in an uneven manner. Within a society can be measured by various methods, including the Lorenz curve and the Gini coefficient. Economists generally agree that certain amounts of inequality are necessary and desirable but that excessive inequality leads to efficiency problems and social injustice.

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

Income in Philosophy and Ethics

Throughout history, many scholars have written about the impact of income growth on morality and society. In particular, a number of scholars have come to the conclusion that material progress and prosperity, as manifested in continuous income growth at both individual and national level, provide the indispensable foundation for sustaining any kind of morality. This argument was explicitly given by Adam Smith in his Theory of Moral Sentiments, and has more recently been developed in depth by Harvard economist Benjamin Friedman in his well-acclaimed recent book The Moral Consequences of Economic Growth.

Meaning within U.S. accountancy

In U.S. business and financial accounting, the term 'income' is also synonymous with revenue; however, many people use it as shorthand for net income, which is the amount of money that a company earns after covering all of its costs.

Net income is also called 'net profit'. It is calculated as follows:

1. The gross income or gross revenue is tabulated.
2. Where applicable, the cost of goods sold or cost of operations figure is subtracted from the gross income to yield the gross profit.
3. All expenses other the COGS or COO are subsequently subtracted from the gross profit to yield the net profit or net income - or, if a negative number, the net loss (usually written in parentheses). More commonly, this is called "Net Income (or Loss) Before Taxes".
4. Taxes are then subtracted from the pre-tax net income to give a final net income or net profit (or net loss) figure.

Net income or net profit which is not expended to shareholders in the form of dividends becomes part of retained earnings.

All public companies are required to provide financial statements on a quarterly basis, and the income statement of income is one of the most important of these. 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?"

It is common for some other companies, such as real estate investment trusts, to present reports using a standard called FFO, or "Funds From Operations". Like EBITDA reporting, FFO ignores depreciation and amortization. This is widely accepted in the industry, as real estate values tend to increase rather than decrease over time, and many data sites report earnings per share data using FFO.

Full and Haig-Simons income

Full income refers to the accumulation of both, monetary and non-monetary consumption ability of any given entity, such a person or household. According to the what economist Nicholas Barr describes as the "classical definition of income:" the 1938 Haig-Simons definition, "income may be defined as the... sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights..." Since the consumption potential of non-monetary goods, such as leisure, cannot be measured, monetary income may be thought of as a proxy for full income. As such, however, it is criticized for being unreliable, i.e. failing to accurately reflect affluence and that is consumption opportunities of any given agent. It omits the utility a person may derive from non-monetary income and, on a macroeconomic level, fails to accurately chart social welfare. According Barr, "in practice money income as a proportion of total income varies widely and unsystematically. Non-observability of full-income prevent a complete characterization of the individual opportunity set, forcing us to use the unreliable yardstick of money income." On the macro-economic level, national per-capita income, increases with the consumption of activities that produce harm and omits many variables of societal health.

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