I. Accounting Income and Its Forming Factors
Accounting income is important because in today's society, accounting income and its measurement can reflect the key operating results of a company, which is the basis for taxation, a tool for investment, credit decisions, and financial forecasting, as well as a means to measure the efficiency of business operations. In China, the term "accounting income" is not commonly used (commonly used terms are revenue, expenses, and profit), and there are even some misunderstandings about this concept. For example, the "Guidelines for Enterprise Accounting Standards - Revenue" points out that the economic benefits increased by an enterprise during an accounting period, excluding all owner investments, are generally referred to as income, and income includes revenue and gains. This is clearly different from the aforementioned concept of accounting income; without matching revenue and gains with expenses and losses, how can a difference be derived? It cannot be called accounting income if it is not the difference between revenue and related expenses.
Currently, many accounting scholars are studying the issue of financial accounting conceptual frameworks. In fact, the definition and classification of accounting income and its forming factors are part of the financial accounting conceptual framework. It refers to a series of basic concepts and inherent relationships regarding accounting income and its forming factors, along with a series of principles running through them. It should be guided by the objectives of financial accounting and the quality characteristics of accounting information, constrained by balance sheet accounting elements, and threaded through by a series of accounting principles. Therefore, we should approach this issue from multiple angles, comprehensively, and three-dimensionally.
II. Issues with the Definition and Classification of Accounting Income and Its Forming Factors in China
Taking the "Enterprise Accounting System" as an example, revenue refers to the total inflow of economic benefits formed by an enterprise in selling goods, providing services, and transferring asset usage rights in daily activities, including main operating revenue and other operating revenues; expenses refer to the outflow of economic benefits incurred by an enterprise in selling goods, providing services, and other daily activities; cost refers to the consumption incurred by an enterprise in producing products and providing services; profit refers to the operating result of an enterprise within a certain accounting period, including operating profit, total profit, and net profit. Through analysis, I believe that the following issues exist in the definition and classification of accounting income and its forming factors in China’s accounting standards:
1. The standardization of accounting income and its forming factors is not comprehensive or systematic enough. According to the traditional concept of accounting income, accounting income is the result of matching relevant revenue with expenses within a certain period. Thus, determining accounting income is converted into the measurement and matching of revenue and expenses. Broadly speaking, revenue includes operating revenue and gains; narrowly speaking, it only refers to operating revenue. Expenses broadly include operating expenses and losses; narrowly speaking, they only refer to operating expenses. From the definition of revenue in the "Enterprise Accounting Standards - Revenue" and the "Enterprise Accounting System," the emphasis on revenue being formed in daily activities obviously refers to operating revenue.
Regarding gains, China has not formulated relevant accounting standards to regulate them, only listing various non-operating incomes in the "Enterprise Accounting System." Regarding costs, expenses, and losses, China also has not formulated relevant accounting standards, and the regulation of costs and expenses in the "Enterprise Accounting System" is equally simple, with non-operating expenses listed. A consistent, coherent, and harmonious concept system is very important in accounting disciplines. An incomplete and unsystematic concept standard will not be conducive to the construction of accounting theory and the operation of accounting practices.
2. The definitions of revenue, expenses, and profit are not scientific enough. As seen from the above analysis, external investments by enterprises also belong to the act of transferring asset usage rights, and the returns from external investments are counted as investment income, not included in main operating revenue or other operating revenue. Therefore, the definition of revenue does not have consistent internal and external meanings. From the definition of revenue, it emphasizes the total inflow of economic benefits. In the "Guidelines for Enterprise Accounting Standards - Revenue," economic benefits refer to the direct or indirect inflow of cash or cash equivalents into the enterprise, and revenue may be represented as an increase in assets or an increase in owner's equity, or both. Cash or cash equivalents are part of the enterprise's assets, and their increase also means an increase in assets but cannot directly indicate an increase in owner's equity.
Why can't we specify, like the Financial Accounting Standards Board (FASB) in the United States, that revenue refers to the cash inflows, increases in other assets, or liabilities extinguished, or both, resulting from the sale of goods or production of products, provision of services, or engagement in continuous significant or core operating activities of an entity? Using the concept of total inflow of economic benefits does not directly specify the nature of revenue nor its form, easily leading people to associate it with cash flow, causing misunderstandings. Similarly, expenses refer to the total outflow of economic benefits; why not specify that expenses are cash outflows, consumption of other assets, or assumption of liabilities, or both?
China separately defines profit as the operating result of an enterprise. Regarding period earnings, there are two major viewpoints: one is the current operating performance view; the other is the comprehensive income view. The current operating performance view holds that when measuring period earnings, the focus is on the "current period" and the impact on "operating activities," including only those activities or transactions determined by current operations and controllable by management. The comprehensive income view emphasizes that income should reflect the total impact of all borrowing items occurring during the period and their comparability. Under this concept, non-operating businesses, extraordinary items, and adjustments to prior period gains and losses are all included in current net income. China's definition of profit emphasizes operating results, seemingly leaning towards the current operating performance view; from its content, although it cannot be said to represent the comprehensive income view, it at least represents a modified comprehensive income view. Clearly, a definition mixing different concepts seems inappropriate.
3. From the perspective of existing accounting income factors, there is very limited room for expansion. FASB proposed ten accounting elements: assets, liabilities, equity, owner investment, distribution to owners, comprehensive income, revenue, expenses, gains, and losses. China only has six accounting elements: assets, liabilities, owner's equity, revenue, expenses, and profit. From the growth of economic transactions, having only six accounting elements is insufficient. On one hand, businesses involving gains and losses are common, and China only lists them without defining, classifying, or reporting them, not elevating them to accounting elements, which is unscientific. On the other hand, FASB officially recommends that companies report comprehensive income for the current period in a complete set of financial statements, requiring companies to add a fourth accounting statement - the comprehensive income statement. The UK requires companies to add a statement of total recognized gains and losses to reflect overall financial performance. The International Accounting Standards Board also recognizes this statement and requires its preparation.
Many Chinese accounting scholars are also studying comprehensive income. They believe that implementing the comprehensive income statement in China is not only necessary but feasible. First, promoting this statement at this stage is crucial for standardizing information disclosure of listed companies, protecting the legitimate rights of a wide range of investors, and promoting the healthy development of the securities market; secondly, fulfilling the comprehensive income statement helps solve existing and potential accounting problems in China and facilitates international coordination. To add a comprehensive income statement in China, it is necessary to add accounting elements related to comprehensive income.
III. Re-defining and Classifying Accounting Income and Its Forming Factors in China
(1) Principles for Re-defining and Classifying Accounting Income and Its Forming Factors in China
1. Consistency with Relevant Content in Existing Accounting Standards.
Since the reform and opening up, China has formulated a series of accounting standards, including the "Regulations on Enterprise Financial Accounting Reports," "Enterprise Accounting Standards," and "Enterprise Accounting System," making accounting standards increasingly perfect. When re-defining and classifying accounting income and its forming factors in China now, it is essential to consider the evolution trajectory of accounting standards, align as much as possible with existing accounting standards, and maintain relative stability.
2. Clarity and Orderliness.
When re-defining and classifying accounting income and its forming factors in China, can we achieve clarity and orderliness similar to the definition and classification of assets, liabilities, and owner's equity? Accounting professionals emphasize the clarity and orderliness of concepts and standards, making them easier to understand and apply in practice. The definition and classification of China's accounting income and its forming factors should draw lessons from the methods and forms of defining and classifying assets, liabilities, and owner's equity, striving to achieve clarity and orderliness.
3. Consistency with International Practices.
China has joined the WTO, and accounting standards should be basically consistent with international practices. However, the internationalization and nationalization of accounting standards have always been a pair of contradictions: emphasizing internationalization may seem like copying blindly; emphasizing nationalization might fail to keep up with international trends. How to be consistent with international practices is a problem that needs in-depth research. When re-defining and classifying accounting income and its forming factors in China, it is still necessary to absorb the essence of Western accounting standards and expand the conceptual space of accounting income and its forming factors.
(2) Hypothesis for Re-defining and Classifying Accounting Income and Its Forming Factors in China
Based on the above analysis, I believe that China's accounting income elements should be divided into revenue, expenses, profit, and comprehensive income.
1. Revenue.
Refers to the increase in economic benefits of an enterprise within a certain period, manifested as the inflow of cash, the increase in other assets, or the extinguishment of liabilities, or a combination thereof. Specifically includes:
① Operating Revenue, which is the inflow of economic benefits formed by an enterprise in selling goods, providing services, and transferring asset usage rights in daily operating activities. It includes main operating revenue, other operating revenue, and investment income.
② Gains, which are the inflows of economic benefits caused by transactions outside the main operating activities or occasionally occurring transactions of an enterprise.
2. Expenses.
Refers to the decrease in economic benefits of an enterprise within a certain period, manifested as the outflow of cash, the consumption of other assets, or the assumption of liabilities, or a combination thereof. Specifically includes:
① Operating Expenses. The outflow of economic benefits incurred by an enterprise in engaging in daily operating activities such as selling goods and providing services. It includes main operating costs, main operating taxes and surcharges, other operating expenses, period expenses, investment losses, etc.
② Losses. The outflow of economic benefits caused by transactions outside the main operating activities or occasionally occurring transactions of an enterprise.
3. Profit.
Refers to the difference after matching confirmed revenue with related expenses, reflecting the main operating results achieved by the enterprise. It includes operating profit, other operating profits, and the net amount of gains and losses.
4. Comprehensive Income.
The comprehensive change in net assets of an enterprise caused by non-owner transactions within a certain period. Specifically includes:
① Profit, as defined earlier.
② Other Comprehensive Income, the unrealized changes in net assets confirmed by an enterprise within a certain period, such as changes in the market price of held assets, changes in investment values, holding gains and losses of derivative financial instruments, etc.
The relationship between the above accounting elements can be summarized as: Revenue - Expenses = Profit; (Operating Revenue + Gains) - (Operating Expenses + Losses) + Other Comprehensive Income = Comprehensive Income.