VII. THE PRIMARY DISTRIBUTION OF INCOME ACCOUNT
A. Introduction
| 7.1. | The primary distribution of income account consists of two consecutive accounts: the generation of income account and the allocation of primary income account (see tables 7.1 and 7.2). When appropriate, the latter may be divided into two further sub-accounts: the entrepreneurial income account and the allocation of other primary income account (see table 7.3). | | | Text refers to: table 7.1.  | | | Text refers to: table 7.2. | | | Text refers to: table 7.3. |
| 7.2. | The general purpose of the primary distribution of income account is to show how primary incomes are distributed among institutional units and sectors. Primary incomes are incomes that accrue to institutional units as a consequence of their involvement in processes of production or ownership of assets that may be needed for purposes of production. They are payable out of the value added created by production. The primary incomes that accrue by lending or renting financial or tangible non-produced assets, including land, to other units for use in production are described as property incomes. Receipts from taxes on production and imports are treated as primary incomes of governments even though not all of them may be recorded as payable out of the value added of enterprises. Primary incomes do not include social contributions and benefits, current taxes on income, wealth, etc. and other current transfers, such current transfers being recorded in the secondary distribution of income account. |
1. The generation of income account
| 7.3. | The generation of income account is compiled for resident enterprises or groups of resident enterprises, i.e., for resident institutional units in their capacities as producers of goods and services. It represents a further extension or elaboration of the production account in which the primary incomes accruing to government units and to the units participating directly in production are recorded. Like the production account, it may be compiled for establishments and industries as well as for institutional units and sectors. The generation of income account shows the sectors, sub-sectors or industries in which the primary incomes originate, as distinct from the sectors or sub-sectors destined to receive such incomes. For example, the compensation of employees recorded in the generation of income account for the household sector consists of the total compensation of employees payable by unincorporated enterprises owned by households. This item is very different from the total compensation of employees receivable by the household sector that is recorded in the account below, the allocation of primary income account. | | | Text refers to: table 7.1. |
| 7.4. | The resources, listed on the right side of the generation of income account, consist of only a single item, value added, the balancing item carried forward from the production account. As stated in chapter VI, gross value added is defined as the value of output minus the value of intermediate consumption. Value added may also be measured net: i.e., after deducting the consumption of fixed capital on the fixed assets used in the production process. Consumption of fixed capital is a cost of production that should preferably be deducted from output along with intermediate consumption whenever possible. However, the data available do not always permit satisfactory estimates to be made of consumption of fixed capital, so that provision has to be made in the accounts of the System for value added to be measured gross as well as net. Provision must therefore also be made throughout the remaining accounts of the System for the relevant balancing items to be measured gross or net of consumption of fixed capital. The concept and measurement of consumption of fixed capital has already been explained in detail in chapter VI. For simplicity, it will be assumed that value added is measured net, except when the context requires gross value added to be referred to explicitly. | | | Text refers to: table 7.1. |
| 7.5. | The left side of the generation of income account records the uses of value added. As property incomes payable by enterprises are recorded in the following account, there are only two main types of charges that producers have to meet out of value added: compensation of employees payable to workers employed in the production process and any taxes, less subsidies, on production payable or receivable as a result of engaging in production. The latter consist of taxes payable or subsidies receivable on goods or services produced as outputs and other taxes or subsidies on production, such as those payable on the labour, machinery, buildings or other assets used in production. Taxes on production do not include any income taxes payable by the recipients of incomes accruing from production, whether employers or employees. Both compensation of employees and taxes on production may be payable by resident producers to non-residents. | | | Text refers to: table 7.1. |
| 7.6. | The content of the item taxes, less subsidies, on production payable out of value added varies according to the way in which output is valued. Value added tax (VAT), or other similar deductible tax, invoiced on output is never treated as part of the price receivable by the producer from the purchaser. Invoiced VAT is therefore always omitted from value of output, whether output is valued at producers' or basic prices. Hence, invoiced VAT is not a charge against value added and is not recorded as a payable in the producer's generation of income account. However, when output is valued at producers' prices any other tax on product payable on the output is treated as an integral part of the price receivable by the producer from the purchaser. The tax is therefore recorded as being payable by the producer out of value added at producers' prices in the generation of income account - that is, as a component of the item "taxes less subsidies on production". Similarly, any subsidy on product on the output is recorded as being receivable by the producer from government in the generation of income account as a supplement to value added at producers' prices. In practice, however, it is not recorded under resources but as a component of "taxes less subsidies on production" as if it were a negative tax on output. | | | Text refers to: table 7.1. |
| 7.7. | As explained in chapter VI, the basic price is obtained from the producer's price by deducting any tax on product payable on a unit of output (other than invoiced VAT already omitted from the producer's price) and adding any subsidy on product receivable on a unit of output. In consequence, no product taxes or subsidies on outputs are to be recorded as payables or receivables in the producer's generation of income account when value added is measured at basic prices. It follows that the item "taxes less subsidies on production" refers only to other taxes or subsidies on production. | | | Text refers to: table 7.1. |
| 7.8. | After deducting compensation of employees and taxes, less subsidies, on production from value added, the balancing item of the generation of income account is obtained, described either as the operating surplus or mixed income depending upon the nature of the enterprise. This balancing item is also shown on the left side of the account under uses, regardless of whether output and value added are measured at basic prices or at producers' prices. It measures the surplus or deficit accruing from production before taking account of any interest, rent or similar charges payable on financial or tangible non-produced assets borrowed or rented by the enterprise, or any interest, rent or similar receipts receivable on financial or tangible non-produced assets owned by the enterprise. The balancing item is described as the operating surplus except for unincorporated enterprises owned by households in which the owner(s) or members of the same household may contribute unpaid labour inputs of a similar kind to those that could be provided by paid employees. In the latter case, the balancing item is described as mixed income because it implicitly contains an element of remuneration for work done by the owner, or other members of the household, that cannot be separately identified from the return to the owner as entrepreneur. | | | Text refers to: table 7.1. |
| 7.9. | When the enterprise is a non-market producer owned by a government unit or a non-profit institution (NPI), the output that it provides to other units cannot be valued on the basis of actual or estimated market prices. By convention, such output is valued by its costs of production - intermediate consumption, consumption of fixed capital, compensation of employees plus taxes, less subsidies, on production other than taxes or subsidies or products. No net operating surplus is generated when output is valued in this way by the sum of the values of the inputs. | | | Text refers to: table 7.1. |
| 7.10. | All the inputs into, and outputs from, processes of production are valued at the times they are used, or produced, as distinct from the times they were acquired or disposed of (see chapter VI). In consequence, output, intermediate consumption and consumption of fixed capital are all defined and valued in such a way as to exclude holding gains on the inventories and fixed assets employed in production. The operating surplus, or mixed income, is therefore a measure of profit that also excludes holding gains. On the other hand, profits as reported in business accounts based on historic costs usually do not separate holding gains on inventories and fixed assets from the operating surplus and may therefore be much larger than the operating surplus on its own when there is inflation. | | | Text refers to: table 7.1. |
| 7.11. | As noted in chapter VI, gross domestic product (GDP) at market prices for the total economy is equal to the sum of the gross values added of all resident enterprises plus those taxes, less subsidies, on products that are not payable on the values of the outputs of those enterprises, i.e., taxes or subsidies on imports plus non-deductible VAT when output is valued at producers' prices, and all taxes or subsidies on products when output is valued at basic prices. Taxes and subsidies on imports and VAT must therefore also be recorded under uses of GDP in the generation of income account for the total economy, even though they do not appear in the generation of income account for individual institutional units or sectors. | | | Text refers to: table 7.1. |
2. The allocation of primary income account
| 7.12. | The allocation of primary income account focuses on resident institutional units or sectors in their capacity as recipients of primary incomes rather than as producers whose activities generate primary incomes. It includes the amounts of property incomes receivable and payable by institutional units or sectors. As already noted, the generation of income account, being related to production activities, can be compiled for establishments and industries as well as for institutional units and sectors. However, the allocation of primary income account has no such direct link with production and can only be compiled for institutional units and sectors. | | | Text refers to: table 7.2. |
| 7.13. | There are two kinds of income listed under resources on the right side of the allocation of primary income account. The first consists of primary incomes already recorded in the generation of income account that are receivable by resident institutional units, these consist of:
(a) Compensation of employees receivable by households;
(b) Taxes (less subsidies) on production or imports receivable (or payable) by government units;
(c) Operating surplus, or mixed income, of enterprises carried forward from the generation of income account.
The second kind consists of property incomes receivable from the ownership of financial or tangible non-produced assets (mainly land or sub-soil assets):
(d) Interest, dividends and similar incomes receivable by the owners of financial assets;
(e) Rents receivable by owners of land or sub-soil assets leased to other units.
The incomes receivable under the above items (a), (b) and (d) include incomes receivable from non-resident institutional units. | | | Text refers to: table 7.2. |
| 7.14. | The uses, listed on the left side of the allocation of primary income account, consist only of the property incomes payable by institutional units or sectors to creditors, shareholders, landowners, etc. Except for rents on land and sub-soil assets, these may be payable to non-residents as well as residents. The remaining item recorded under uses is the balancing item, the balance of primary incomes, defined as the total value of the primary incomes receivable by an institutional unit or sector less the total of the primary incomes payable. At the level of the total economy it is described as national income. | | | Text refers to: table 7.2. |
| 7.15. | The composition of the balance of primary incomes varies considerably from one sector to another as certain types of primary incomes are receivable by certain sectors only or by non-residents. In particular, taxes are received only by the general government sector and non-residents while compensation of employees is received only by the household sector and non-residents. These balances consist of:
(a) The balance of primary incomes of the non-financial and financial corporate sectors consists only of operating surplus plus property income receivable less property income payable;
(b) The balance of primary incomes of the general government sector consists of taxes, less subsidies, receivable or payable on production and on imports, plus property income receivable less property income payable. It may also include a small amount of operating surplus from government-owned unincorporated enterprises;
(c) The balance of primary incomes of the household sector consists of compensation of employees and mixed incomes accruing to households, plus property income receivable less property income payable. It also includes the operating surplus from housing services produced for own consumption by owner-occupiers;
(d) The balance of primary incomes of the non-profit institutions (NPIs) serving household sectors consists almost entirely of property income receivable less property income payable.
Primary incomes in the form of compensation of employees, taxes or subsidies on production or imports, and property incomes (except rents on land) may all be receivable by residents from non-residents and payable to non-residents. The difference between the total values of the primary incomes receivable from, and payable to, non-residents is often described as "net income from abroad". | | | Text refers to: table 7.2. |
Gross national income and net national income
| 7.16. | The aggregate value of the net balances of primary incomes summed over all sectors is described as net national income (NNI). Similarly, the aggregate value of the gross balances of primary incomes for all sectors is defined as gross national income (GNI). The latter is identical with gross national product (GNP), as hitherto understood in national accounts generally. However, conceptually, both NNI and GNI are measures of income and not product. | | | Text refers to: table 7.2. |
| 7.17. | Gross value added is strictly a production measure defined only in terms of output and intermediate consumption. It follows that GDP at market prices is also essentially a production measure as it is obtained by summing the gross values added of all resident institutional units, in their capacities as producers, and adding the values of any taxes, less subsidies, on production or imports not already included in the values of the outputs, and values added, of resident producers. GNI is obtained by summing the balance of primary incomes of the same resident institutional units. It follows that the difference between the numerical values of GNI and GDP is equal to the difference between the total primary incomes receivable by residents from non-residents and the total primary incomes payable by residents to non-residents (i.e., net income from abroad). However, as both GDP and GNI are obtained by summing over the same set of resident institutional units, there is no justification for labelling one as "domestic" and the other as "national". Both aggregates refer to the total economy defined as the complete set of resident institutional units or sectors. The difference between them is not one of coverage but the fact that one measures output while the other measures income. Both have an equal claim to be described as domestic or as national. However, as the terms "domestic" and "national" are deeply embedded in economic usage, it is not proposed to change them but to emphasize the fact that GNP is actually an income concept by renaming it GNI. | | | Text refers to: table 7.2. |
3. The entrepreneurial income account
| 7.18. | The allocation of primary income account may be partitioned into two sub-accounts: the entrepreneurial income account and the allocation of other primary income account. The purpose is to identify an additional balancing item, entrepreneurial income, that may be useful for market producers. Like the operating surplus and mixed income, it is a balancing item that is only relevant to producers, but one that can only be calculated for institutional units and sectors and not for establishments and industries. The entrepreneurial income for a corporation, quasi-corporation, or institutional unit owning an unincorporated enterprise engaged in market production is defined as its
operating surplus or mixed income,
plus
property income receivable on the financial or other assets owned by the
enterprise,
minus
interest payable on the liabilities of the enterprise and rents payable on
land or other tangible non-produced assets rented by the enterprise.
Entrepreneurial income may also be calculable in respect of the production of housing services for own final consumption. It should be noted that, in the case of the non-financial and financial corporations sectors, the only difference between entrepreneurial income and the balance of primary incomes is that entrepreneurial income is measured before the payment of dividends and withdrawals of income from quasi-corporations. It is an income concept that is close to the concept of profit and loss as understood in business accounting (at least when there is no inflation) because it is calculated after deducting from the operating surplus any interest and rents payable and adding property incomes receivable. On the other hand, it should be remembered that when profits are calculated at historic costs in business accounts, they also include nominal holding gains on the inventories and other assets owned by the enterprise that may be quite substantial during inflationary conditions. | | | Text refers to: table 7.3. |
| 7.19. | The entrepreneurial income of a corporation can be readily identified in its accounts. However, in the case of an institutional unit that owns an unincorporated enterprise, it is necessary to separate the assets and liabilities of the enterprise from those of its owner, typically a household or a government unit. In practice, it may be difficult to make this separation, bearing in mind that the owner of an unincorporated enterprise is, by definition, legally indistinguishable from the enterprise itself and therefore responsible for all liabilities incurred by the enterprise. When an unincorporated enterprise is treated as a quasi-corporation, it must be possible to identify the entrepreneurial income out of which income may be withdrawn by the owner(s), as the availability of the necessary accounting information is a prerequisite for being able to treat the enterprise as a quasi-corporation. For a household that owns an ordinary unincorporated enterprise, however, it may not be feasible to divide the property incomes payable and receivable into those attributable to the enterprise and those attributable to the owner(s) in a personal capacity. In such cases it is not possible to estimate entrepreneurial income. | | | Text refers to: table 7.3. |
| 7.20. | When the entrepreneurial income account is compiled for an institutional unit or sector, it is followed by the allocation of other primary income account in order to arrive at the balance of primary incomes. In the allocation of other primary income account the first item listed under resources is entrepreneurial income, the balancing item carried forward from the entrepreneurial income account instead of operating surplus or mixed income carried forward from the generation of income account. The remaining primary incomes listed under resources in the allocation of other primary income account, therefore, consist of the following items:
(a) Compensation of employees receivable by households;
(b) Taxes, less subsidies, on production and imports receivable or payable by government units;
(c) Property incomes receivable on assets owned except those receivable by enterprises and included in entrepreneurial income.
Under uses, the only items recorded are property incomes payable, except the interest or rents payable by enterprises. The balancing item of the allocation of other primary income account is identical with the balancing item of the allocation of primary income account. | | | Text refers to: table 7.3. |
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