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Income Overview, Definition and Basic Concepts

There will always be an inflow and outflow of resources for every business transaction. More often than not, this can be in the form of money or any other consideration agreed upon.

While both dealings can happen in a single enterprise or proprietor, owners more frequently check their income inflows first in their financial statements.

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Income is a monetary consideration for performing services or selling goods and products. Whether you’re an employee, self-employed or a business owner, the value you earn from these activities is your income.

In a much more complex business transaction, income may also be in the form of pension distributions or returns on investments in individuals. For enterprises, income can be in the form of reserves, dividends or interests.

Given the vast nature of income, we must understand where it comes from, how we should account for it, how it affects our finances, and what it implies in financial performance.

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This section will help us learn about income through the following classifications and types:

???????? ?????? – Earnings, salaries, commissions, tips, rent, bonuses, retirement proceeds and royalties constitute ordinary income. For individuals, their income often comes from salaries and wages from employers. For corporate enterprises, income originates from their day-to-day operations. Ordinary income is also taxable at marginal rates.

??????? ????? – This income arises from selling short or long-term assets. Short-term capital gains are from assets held for a year or less. Long-term, on the other hand, comes from assets held for more than a year. Capital gains may be in the form of physical properties or financial instruments like stocks and bonds.

??? ?????? ?????? – Another income classification is those not subject to taxes such as interests paid on treasury securities and federal bonds. However, levying jurisdictions vary in identifying tax-exempt transactions. This concept suggests that an income subject to taxes in one country may be exempt in the other. Some transactions can also be partially exempt and subject to income taxes.

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We often see gross and net income components on our pay slips or financial statements.

How do these incomes differ? Let’s see this comparison.

Gross income constitutes the proceeds earned for a specific period before considering deductions for individuals or expenses for businesses. Taxes and withholdings, on the other hand, are not part of the gross income computation. In simple terms, gross income is what you exactly earn from your employment or business operations.

Meanwhile, net income passes through different deductions and expenses. Here are some examples of income deductions:

Retirement plan

Legal or professional fees

Statutory contributions

Examples of expenses subtracted from income are:

Marketing costs

Travel expenses

Office expenses

Tax payments

The identification, classification and recognition of income take some time to master and apply due to its broad nature. While expert advice is always essential, we should still consciously learn basic concepts to understand our finances or how our enterprises work. By then, we can gain better control of our resources and manage them more efficiently.

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