What is Income?

Definition of Income

Income is money earned by a person or a business in exchange for labor, the provision of a product or service, or the investment of capital. A pension, a government payment, or a gift can all contribute to a person's income.

Income might be taxable, tax-exempt, or tax-reduced according to a government tax agency.

Income might be disposable or discretionary in the eyes of an economist.

Income in Accounting

Accounting is comparable to other professions in that words can have a variety of meanings depending on the circumstances. In the accounting profession, the term "income" can refer to a variety of things.

One definition of income is revenue or sales. Revenue is the money earned by a firm from the sale of goods or services over the course of its operations. Revenue is a credit account with an equity balance. Sales are recorded in the revenue accounts and posted to the trial balance throughout the year. The revenue is subsequently reflected on the income statement's first line. Because it contains all of the company's income and sales before deducting expenses, it's also known as gross income, total sales, or top line sales.

Net income is another definition of income. The terms "net income" and "gross income" are not interchangeable. After all of the cost of products sold and operational expenditures have been deducted, net income appears at the bottom of the income statement. Complete company sales minus total company expenses equals net income. As you can see, the net income definition differs significantly from the revenue definition.

Instead of revenues, the term income is most usually used to refer to net income. When reading examples or seeing concerns involving a company's income, be cautious. You'll need to examine the question and determine what definition of income is being used. The net income definition will be used most of the time.

TAKEAWAYS IMPORTANT

• The money that people and businesses get in exchange for working, producing a product or service, or investing capital is referred to as income. Pensions and government programmes provide income for some.
• Businesses make money by selling goods or services for a higher price than their cost of production.
• The IRS treats income generated in a variety of ways differently.

Know more about Income

For the most part, income is the money we spend to cover our daily expenses. Wages, salaries, freelancing payments, and small business receipts are all examples of sources of income.

Other sources of income include investments, pensions, Social Security, and other government-sponsored programmes. Some people get money from trust funds or monetary donations from family members.

After paying all expenses and taxes, a company's residual revenues are referred to as business income. Income is referred to as earnings in this scenario. The majority of sources of income are taxed by the municipal, state, and federal governments.

Individuals gain money by working and investing in financial assets like stocks, bonds, and real estate. 2 An investor's stock holdings, for example, may provide income in the form of annual dividends.

It is also possible to inherit money.

Taxable Income

Although tax rates vary, some amounts of income may be tax-exempt, and the laws can be mind-numbingly complex, most of the following sources of income are taxable.

Earned income is taxed by the government before it reaches the employee in the United States, as it is in most other nations. Income taxes provide funding for government operations and programmes as outlined in federal and state budgets.

Unearned income is defined by the Internal Revenue Service (IRS) as income derived from sources other than an employment, such as investment income.

In the United States, taxable income includes earnings, salary, interest, dividends, business income, capital gains, and pensions received within a given tax year.

Annuity payments, rental income, farming and fishing revenue, unemployment compensation, retirement plan distributions, and stock options are all examples of taxable income.

Gambling revenue, bartering income, and jury duty compensation are all examples of lesser-known types of taxable income.

Ordinary income consists primarily of wages, salaries, commissions, and interest income from bonds, and includes the types of revenue indicated above.

Regular income is subject to ordinary income tax rates. In contrast to capital gains or dividend income, this form of income can only be offset with regular tax deductions, whereas capital gains can only be offset with capital losses.

Tax-Free Income

Interest income from U.S. Treasury securities (which is exempt at the state and local levels), interest from municipal bonds (which is not necessarily exempt at all three levels), and capital gains that are offset by capital losses are all examples of tax-free income.

Qualified dividends and long-term capital gains are examples of income that is taxed at a reduced rate.

If a recipient's other income exceeds specific thresholds, Social Security benefits are taxable.

Difference between Disposable and Discretionary Income

After taxes, disposable income is defined as the money that is left over. Housing, food, and transportation are among the needs that people spend their disposable income on.

Discretionary income is the money left over after taxes and all other necessary expenses have been paid. Vacations, restaurant meals, cable television, and movies are all examples of non-essential spending.

Individuals tend to be more conservative with their discretionary income during a recession. A family's discretionary income could be used to make extra mortgage payments or put aside money for an unforeseen need.

Because the costs of necessary products are not deducted from disposable income, disposable income is larger than discretionary income within the same household.

Government economists utilize both disposable and discretionary income projections, which are calculated at the national level, to anticipate the projected amount of consumer spending in the near future.

However, these measures must take into consideration people's propensity to buy at any given time, which varies depending on the state of the economy in general and the person or family's position in particular.

What Is Considered Taxable Income?

In the United States, taxable income includes wages, salaries, interest, dividends, company income, capital gains, and pensions. All of these forms of income are considered regular income and are taxed at ordinary income rates.

Only tax deductions can be used to offset ordinary income.