Measurement of Income

• Author: Vern Krishna
• Pages: 143-171

Chapter VI: Measurement of Income 143

Chapter VI: Measurement of

Income

A. GENERAL COMMENT

“Income” is a measure of gain over a period of time. us, measur-

ing income requires that we identify the amount of the gain and re-

late it to the appropriate period when we should recognize it. Both

of these aspects of measurement can be uncertain processes inu-

enced by legal, economic, and accounting principles. As we shall

see, the measurement of income is more art than science.

As with all languages, accounting has certain fundamental rules

of structure and composition. We refer to these rules as the prin-

ciples of accounting. Contrary to popular conceptions and, per-

haps, most fortunately, accountants did not devise the fundamental

structural rules of recording nancial data. A Renaissance monk

named Luca Pacioli devised the basic process of recording nancial

data. is process allows us to record information in a methodical

manner for analysis and decision making. It is important to note,

however, that the principles of accounting are neither rigid nor uni-

form. Variations in accounting principles can make comparisons of

nancial information dicult.

B. ACCOUNTING PRINCIPLES

Generally accepted accounting principles (GAAP) are the princi-

ples that underlie the preparation of nancial statements for com-

144 Understanding Financial Statements

mercial use. We say “generally accepted” because they are accepted

by various professional accounting bodies, regulatory agencies, se-

curities commissions, and nancial institutions as appropriate for

nancial statements. In Canada, the CICA Handbook is an authori-

tative source of GAAP. us, the Canada Business Corporations Act

and regulatory statutes recognize it as the benchmark of account-

ing principles.

GAAP, however, encompasses not only the specic recommen-

dations and procedures set out in the Handbook, but also broad

principles and conventions. ese accounting principles develop

over time and through usage. When the Handbook does not cover

a matter, accountants refer to other sources of information. For

example, the CICA’s Emerging Issues Committee (EIC) Abstracts,

International Accounting Standards, standards promulgated by

the Financial Accounting Standards Board (FASB) in the United

States, and accounting literature are useful sources. Unfortunately,

these sources do not always agree on what constitutes GAAP. e

Handbook addresses such potential dierences by saying, “the rela-

tive importance of these various sources is a matter of professional

judgment in the circumstances.”

In practice, the order of importance of these sources is as follows:

• CICA Handbook and EIC Abstracts;

• CICA accounting guidelines;

• Established Canadian practices;

• Recommendations of the FASB in the United States;

• International Accounting standards; and

• Literature.

C. NET INCOME

Corporations registered with the Securities and Exchange Com-

mission (SEC) in the United States may prepare their nancials in

accordance with US GAAP.

 CBCA, s , Reg , “Canadian GAAP” and “Canadian GAAS.”

 See CBCA, Reg .