Gross Income: Concepts and Inclusions Summary, Free Essay for Students

Gross income for a company should equate to gross margin which includes the sales minus the cost of goods sold. It involves the amount paid to the individual before any deductions are done, and thus it includes all the income from any derived source but should not be excluded under the internal revenue code. According to the Supreme Court decisions, every source of income should be taxed unless some of the incomes are excluded by the congress. It also holds that there is no income subject to tax until the taxpayer has recovered the capital invested. This concept is referred to as the recovery of capital doctrine which in its simplest application means that sellers can reduce their amounts received from all sources during annual accounting period without subtracting expenses and costs in order to determine the amount of gross income. When considering the economic and accounting concepts, a choice had to be made by the court on two competing models which are the economic income and accounting income. Economists measure income which is the economic income by first determining the fair market value (FMV) of the individual's net assets which is minus the liabilities at the beginning and end of the year. Change in global tax issues lead to the difference between the beginning and ending balances.

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A business realizes income any time it receives cash or a claim to the cash. It may either realize or recognize income which is dependent on the method used which is either accrual method or the cash method of accounting. Under the accrual method, an item is generally included in the gross income for the year in which it is earned regardless of when the income is collected. Income is therefore recognized in either cash form or "in-kind" money that may include services or property. The amount of income from "in-kind" earnings matches the Fair Market Value (FMV) of the goods or amenities. Income does not encompass regaining of the taxpayer's principal investment. It is usually recognized in the year that is earned rather than when it is collected through the accrual method. Using market values to determine income for tax purposes have always caused some liquidity problems. In most cases, assets of the taxpayer may increase in value even though they cannot be immediately converted to cash that is needed to pay the tax. The courts have always rejected the economic concept of income as impractical.

The accounting concept of income is founded on the realization principle which states that income (accounting income) is not recognized until it is realized and for realization to occur an exchange of goods or services must take place between the accounting entity and some independent external party. Correspondingly, assets that are received by the accounting entity must be valued in order for the income to be recognized after an employee can embezzle the funds from the employer. In a business, income may either be earned or unearned and it is due to this case that a Form 1040 is required in order to report the sum of all earned and unearned income. Therefore, income section of form 1040 is used to report earned and unearned taxable income. Income from personal services is taxable to the person who performs the services while income from property is taxable to the owner of the property, and revenue is registered in the year it is, in fact, or positively collected in hard cash or its equivalent.