• Jun 08,2024

Classification Of Income

Classification of Income Based on Source, Nature, Tax Treatment, and Accounting Principles

1. Source of Income:

Earned Income: Income derived from active participation in employment, business, trade, or profession, including salaries, wages, bonuses, commissions, and self-employment income.

Unearned Income: Income generated from passive sources, investments, or assets, such as interest, dividends, rental income, capital gains, royalties, and annuities.

2. Nature of Income:

Ordinary Income: Income earned from regular business operations, employment, or investments, typically subject to normal tax rates and treatment.

Capital Gains: Income generated from the sale or disposition of capital assets, such as stocks, bonds, real estate, or collectibles, usually taxed at preferential rates.

Dividend Income: Income received from owning shares of a company, distributed out of the company's profits, and typically taxed at special rates.

Interest Income: Income earned from lending money or investing in interest-bearing instruments, such as savings accounts, bonds, or certificates of deposit.

Rental Income: Income generated from leasing or renting out property, such as real estate, equipment, or vehicles.

Business Income: Income derived from operating a business or engaging in trade or commerce, including sales revenue, service income, and profits from business operations.

3. Tax Treatment:

Taxable Income: Income subject to taxation under applicable tax laws, regulations, and rates.

Tax-Exempt Income: Income not subject to taxation, typically due to specific exemptions, deductions, or exclusions provided under tax laws, such as certain types of municipal bond interest or life insurance proceeds.

Tax-Deferred Income: Income that is not taxed immediately but is deferred to a later date, such as contributions to retirement accounts or certain types of investment gains.

4. Accounting Principles:

Accrual Income: Income recognized when it is earned or accrued, regardless of when it is received in cash, in accordance with accrual accounting principles.

Cash Income: Income recognized only when it is actually received in cash or cash equivalents, following cash accounting principles.

5. Periodicity:

Regular Income: Income received on a recurring basis, such as monthly salaries, quarterly dividends, or annual interest payments.

Irregular or One-time Income: Income received infrequently or sporadically, such as bonuses, one-time gains, or windfall profits.

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