Quiz 3: Gross Income: Inclusions and Exclusions


Income is recognised in cash method of accounting at the time of revenue and expense, where revenue is identified when payment is accepted, and expense is identified when payment is done. This is recorded as the payment is in the form of cash at the time of financial year rather than the following or previous financial year. This method of accounting may be misleading or saviour for the company. Thus, income is recognised in cash method of accounting, at the time, when the payment is accepted or done in the form of cash.

Adjusted Gross Income is $58,295; Tax Liability is $5,054; Refund $6,181.

Cash basis taxpayer refers to those who record income on cash basis of accounting. Realisation or recording of income refers to observing income of individual taxpayer in any form. A taxpayer who may be cash based or non-cash based has no difference to make in recording of income.Income can thus be recorded in any form like money, property or services. The individual may receive cash or not but the benefit of the value is enough to record income. Cash mode of transaction is direct for recording of income whereas non-cash based transactions are recorded for the receipt of property or service triggers though they are indirect. The cash basis taxpayer reports their gross income not just for the cash mode of income they received but also for all the indirect income in the form of material, property or service offered or given. These show up with some trigger or receipt becoming income of the individual to report for accounting.Thus for a cash basis taxpayer, the circumstance where they have to report income that are non-cash based are the reception of income in any form like receipt for property which is enough for recognition of income.