Income can be measured in two ways. The first methods which is generally used in the case of small traders who cannot afford elaborate accounting systems is by comparing the networth of an enterprise at the end of the accounting period with the networth at the commencement of the accounting period. If there is an increase in the networth at the amount of increase is taken as income. On the other hand, if there is decrease in the networth such decreases represents loss.
Networth is the difference between gross assets and liabilities of the entity. Liabilities are obligations contracted for andtheir valuation does not pose any problem. However, valuation of assets is one which is very complicated and it is difficult to agree on an such assets. However, with heterogeneous collection of assets with varying lie spans, estimates of future earning power cannot be made accurately. There are also other difficulties in the estimation of future income. For example, what is the period for which this income must be estimated. With business designed to run for long periods.
Estimation of future income alsodepends on the future costs of inputs and outputs which depend on market forces. Accountants do not favour this method as it cannot be substantiated by reasonably objective evidence. If the assets are valued on historical cost basis there is objective evidence for the accountant to rely on such valuation. There is a difficult job for the Accountant of determining how much of the cost is the cost of expired service and how much is to be carried forward as unexpired cost for future expiration. The cost of the unexpired service of the asset is estimated taking into account the total life span of the asset and the balance of the life span it is expected to the productive.
Another way to value assets is on the basis of replacement cost. Measuring income on the basis of comparison of revenue of an accounting period of during the previous period is widely accepted by the Accountants because of the case with which revenue and costs can be verified with objective evidence.