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terms 4 & 5 - KEY TERMS FOR WEEK2-CHAPTERS 4 5...

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KEY TERMS FOR WEEK2---CHAPTERS 4 & 5
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Glossary Chapter 4 Accounting income The accountant's concept of income is generally based upon the realization principle. Financial accounting income may differ from taxable income (e.g., accelerated depreciation might be used for Federal income tax and straight-line depreciation for financial accounting purposes). Differences are included in a reconciliation of taxable and accounting income on Schedule M1 or Schedule M3 of Form 1120 for corporations. Seventy-five percent of the excess of adjusted current earnings over alternative minimum taxable income is an adjustment for alternative minimum tax purposes for a corporation. See also alternative minimum tax and economic income . Accounting method The method under which income and expenses are determined for tax purposes. Major accounting methods are the cash basis and the accrual basis. Special methods are available for the reporting of gain on installment sales, recognition of income on construction projects (the completed contract and percentage of completion methods), and the valuation of inventories (last-in, first-out and first-in, first-out). §§ 446474. See also accrual method, cash receipts method, completed contract method, percentage of completion method , etc. Accrual method A method of accounting that reflects expenses incurred and income earned for any one tax year. In contrast to the cash basis of accounting, expenses do not have to be paid to be deductible nor does income have to be received to be taxable. Unearned income (e.g., prepaid interest and rent) generally is taxed in the year of receipt regardless of the method of accounting used by the taxpayer. § 446(c)(2). See also accounting method, cash receipts method , and unearned income . Alimony and separate maintenance payments Alimony and separate maintenance payments are includible in the gross income of the recipient and are deductible by the payor. The payments must be made in discharge of a legal obligation arising from a marital or family relationship. Child support and voluntary payments are not treated as alimony. Alimony is deductible
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