Objectives Of Income Measurement

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The Objectives of Income Measurement

The measurement of income is useful for more than one purpose and therefore its objectives may be studied form different points of view:

(i)    As a guide to future investment:

The current income positively influences the expectations about the future. The prospective investor looks to the income of the business enterprise as a guide to his investments decisions of the future. The investors attempt to maximize their returns on their investments and their decisions will be guided by income. So the allocation of investment funds and selections of securities depend upon income levels of an enterprise.

(ii)    As a tax base:

Though the Income Tax Act does not define yet it does specify what is taxable and what is deductible in arriving at the taxable income. Accounting income provides income of a business enterprise. The tax authorities can conveniently mobilize the revenues through taxes which are one of the main sources of the Government’s income.

(iii)    As a guide to dividend policy:

The dividend policy at present is directed to determine the proportion of the current income which should be retained and the proportion which should be distributed as dividends. So long as dividends are aid out of current income, the rights of the creditors are adequately protected since other resources of the business enterprise would not be used to pay dividends. There are clear rules for measurement of distributable profits in the Companies Act with a view to protect the interests of the creditors.

(iv)    As an indicator of managerial efficiency:

The efficiency of management as decision makers and as trustees of resources is judged by the reported income of the current year. The auditors therefore certify that the income statement presents true and fair view of operational results. The measurement of business income therefore provides a suitable criterion for the efficiency of management in a competitive economy.

(v)    As a measure of overall efficiency and credit worthiness:

Income is the lifeblood of any business enterprise and therefore it provides that basic standard by which the overall efficiency of the business is assessed. For creditors, profitable enterprise faces no difficulty in making timely payment on its debts. Banks and other credit institutions too depend upon current income levels as a guide about a firm’s ability to repay loan out of future income.

(vi)    As a guide to socio-economic decisions:

A number of decisions affecting the society and economy as a whole are taken keeping in mind the level of business income. For instance, price increases are justified in terms of income levels. Trade unions demand more wages for their employees on the basis of reported income and employers too plead that increase in wages would have adverse effects o the income. The economic policies of the Government are also guided by levels of business income since it constitutes a major source of tax revenues.

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