responding
Responses to at least two classmates’ postings should be approximately 200 words and should be thoughtful, substantial, polite and more extensive than a simple “well done” phrase or “I agree.” Consider points of agreement, disagreement, assumptions, and value judgments. You will be able to respond to others after you submit your initial post.Your grade will be affected by how thoughtful your replies and initial questions are answered.
1) Distinguish earned income from unearned income and provide an example of each.
Income from sources other than employment is unearned income. Unearned income is derived from passive investments, such as interest from savings, bond, alimony, dividends from stocks. Unearned income is not acquired through work.
Earned income on the other hand refers to income derived from employment and through work. Disability payment is also considered earned income. Among others earned income include wages, salaries, and tips. The tax implications for each type of income differ greatly. They are both taxed at a different rate and are treated differently.
Describe in general how the cash method of accounting differs from the accrual method of accounting.
The main difference between cash-based accounting and accrual accounting is the timing of when we recognize revenue and expenses. The cash basis accounting is used by small businesses and recognizes transactions when cash exchanges hand. Accrual accounting on the other hand is used by large corporations and record revenue and expenses as the transactions occur. So revenue is recorded before any money exchanges hands.
2) Distinguish earned income from unearned income and provide an example of each
Unearned income, also known as income from property or passive income source is the income that did not come from employment. Instead, it is earned through other resources such as investments, alimony, dividends from stock, royalties, rents, gains or loss from a property sale, annuities, or interest from the savings account. The tax deduction from unearned income depends on the type of unearned income. There are different percentages of taxes in each of the mentioned examples, and in some cases, it depends on the type of transaction generating the income. For example, long term capital gains and qualified dividends are taxed through preferential tax rates. Other unearned incomes are taxed at ordinary rates.
Earned income, also known income from services or labor, is the income that comes from employment. It is the most common source of income. Examples include salaries, wages, tips, Union strike benefits, earnings from self-employment, long-term disability benefits, all fall under the category of earned incomes. It is hardly exempted from tax deductions. It also includes business income (Spilker et al., 2020).
Describe in general how the cash method of accounting differs from the accrual method of accounting.
The accrual method of accounting is when revenue is accounted for after it is earned. For example, revenue is recorded when products are delivered to a customer while the money is expected to be paid afterward. The expenses of the products or services are recorded before they are paid. Whereas in the cash method of accounting, revenue is reported when the cash is received, and expenses are recorded when the cash is paid. This method is usually used for personal finances or by small businesses.
The key difference between the two is that the cash method is simple; the cash is only accounted for when it is paid or received. It also makes it easier to track the cash flow of a company. On the other hand, the accrual method presents a more accurate picture of a company’s profits because it includes receivable and payable accounts (Morah, 2020).
