5Q - Intermediate Accounting (Kieso)

Question

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

Step-by-Step Solution

Answer

The transaction approach provides information regarding those activities that have occurred during a particular period. This approach is preferable because it includes a detailed explanation of the components.

Step 1: Meaning of Revenues

Revenue refers to the amount of money received from the business's general operations. Costs are deducted from the revenues to get the net income.

Step 2: Explanation of transaction approach

The transaction approach includes the major components of the income statement like revenues, gains, expenses, and loss transactions. The other alternative to measuring income is the capital maintenance approach that includes only the changes in net income but not the essential elements like revenues and expenses of the income statement. Hence, the transaction approach is preferable to any other way to measure income.