What constitutes income in accounting?

In accounting, income is defined primarily by changes in economic resources and the impact they have on the equity of a business. The correct answer highlights that income is comprised of increases in assets and decreases in liabilities, which together lead to an increase in equity, the residual interest in the assets of an entity after deducting liabilities.

When a business earns income, it typically does so by increasing its assets—such as cash, receivables, or inventory—through various activities like sales or providing services. At the same time, if liabilities decrease, it indicates that the business has effectively managed its obligations, further enhancing its financial position and equity. This dual impact reinforces the positive growth of equity, reflecting the success and profitability of the business.

The other options don't correctly encapsulate the definition of income. Increases in liabilities do not represent income; rather, they reflect obligations the business incurs. Decreases in equity, which may result from losses or distributions to owners, do not capture the essence of income generation. Distributions to holders of equity claims do not constitute income either; they represent a sharing of profits or dividends that have already been recognized as income. Therefore, the comprehensive view provided by the correct answer is vital for understanding the core principles of income recognition in