Accrued income is, essentially, money acquired for services or goods that has not yet been paid. In accrual accounting, it is credited to an account only after payment has been made for the same. According to the basic revenue recognition principle, it’s recorded as an obligation only after delivery has been made, and then it becomes a liability. Thus, an account is created with the intention of recording an obligation only after the revenue is realized. In other words, you don’t want to record an asset unless you will eventually realize a surplus or loss.
The question is how does what is accrued income fit into your current tax situation? The basic rule of tax law is that you only deduct what is taxable. That means that if you deduct your home expenses, you only gain the deduction on the amount of the mortgage payment, not the interest or other expenses added to the balance of the loan. If you depreciate an asset instead of recording a credit, the gain is subject to a greater tax deduction.
The accounting principles behind accruals are simple. The first step is to estimate how much income will be produced over a period of time and when that income will be released. The second step is to figure out the basis for all deductions. Those base items are what is accrued income. It’s those that will be taxed if they are included in the final adjusted gross income (AGI) figure.
Some accruals are considered non-taxable because of the offsetting deductible expenses. Those are mainly medical and dental expenses. The second kind of accruals, those that are deductible, are considered taxable. These include expenses such as property taxes, local travel, state and local taxes, utility bills, personal casualty loss, casualty recovery, and interest. Depending on how deductible these expenses are, the amount of the tax will vary. In addition, many business expenses are considered non-taxable also because they are business related expenses incurred with the employees own funds.
The major component of accruals is the capital gain. Gains from the sale or transfer of both tangible assets and intangible assets are included in the accruals. The first part of the equation deals with the price paid for the assets. This part is known as the cash price. The second portion of the equation is the income effect of these prices less depreciation at the current fair market value.
Some people may find the simplicity of the accruals confusing. They may be interested to know what is accrued income and why it might be excluded from their taxes. The major reason that this is important to understand is that some types of what is accrued income are included in a person’s gross income. Conversely, some what is not included in the gross income and would be termed income that is exempted from taxation.
When you calculate what is accrued income you should include the depreciated value of your depreciated tangible assets and the depreciated value of your depreciated operating liabilities. The difference between the two values is your net worth. You may have to subtract your personal assets to determine what is taxable and what is non-taxable. If you have any foreign currency exchanges, U.S. accounts, or tax liens you must deduct them from your net worth. Your tax preparation software will make this process simple for you.
Another important consideration when one considers what is accrued income is capital gains and dividends. These are typically taxed as ordinary income. Many people think that what is capitalized is not taxable until some future date and so they exclude this from their calculations. This is simply not true; capital gains and dividends are included in your net worth calculation and are taxable on your future tax return.