Income Producing Factors of Accounting

Accounting Principles > Income Producing Factors of Accounting

There are four distinct factors which produce income, namely, land, labor, capital and business organization. The income is classified as rent, wages, interest and profit.
Land as used in the economic sense is understood to mean not only the surface but the trees above, the minerals beneath, together with the rivers and surrounding waters, with their contents and sources of power.

The ownership of land gives to the owner the right to possess and use it, or to offer its use to others. For this latter privilege the owner, or landlord as he is sometimes called, derives income which is called rent.

The individual’s first thoughts are usually directed towards supplying the wants of himself and family. Ability to supply individual wants would seem to depend either upon:
a. The possession of land, or
b. The ability to work.

Possessing land, the individual may apply his labor and gain his livelihood. Failing in the possession of land he may sell his services and supply his wants out of the compensation which he receives. Such compensation constitutes his income and is known as his wages.

The result of man joining forces with nature is the production of goods. Goods are of two kinds; those intended for the production of other goods and those intended for consumption. Th« former are called capital goods; the latter consumers’ goods. Expressed in terms of money, both constitute capital, which term from the point of view of the business man is extended to include money itself, being the equivalent of goods. The business man also includes his land, with the natural resources, since he argues that with these he is enabled to increase his income.

Thus it will be seen that the capital of the individual may take the form of:
a. Land and natural resources,
b. Goods.
1. Capital, such as buildings, machinery and tools.
2. Consumable, such as food and clothing.
c. Money, the equivalent of land and goods.

The possessor of capital may use it himself or loan it. If he uses it himself, he derives benefit therefrom. If he loans it, he exacts a charge for its use, which is called interest.

Of the various individuals, some are forced to content themselves with wages; others are content with the rent derived from the land; still others are satisfied with interest on capital; while the majority perhaps aspire to greater income which is to be derived from business organization, as it is commonly called in this country.

The income derived from investment in a business organization is known as profit.

The individual who undertakes a business venture is commonly referred to in economics as an entrepreneur.
Land is excluded as a factor in organization for the reason that it is included as a part of capital. Land used as land undoubtedly produces income in the form of rent. Land used or included as a capital contribution to an enterprise becomes a factor in the production of interest or profit.

Of the four main factors of production, land, labor, capital and business organization, the latter, the prime object of which is supplying the wants of the masses for profit, becomes from an accounting point of view the prime topic of interest.

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