Chapter 3 11-12

Chapter 3 11-12 - ACCT 403 CHAPTER 3 FALL 2011 INCOME...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ACCT 403 CHAPTER 3 – FALL 2011 INCOME SOURCES I. Conceptual Definition of Income A. Economist’s – Income = Change in net worth + consumption. B. Accountant’s - Income is measured using a transaction approach. That is, an event (sale or services) must occur before it is measured. This is known as the realization principle. 1. Traditionally, Income = Consideration received less the historical cost of the consideration given (or assets consumed). C. Tax measurement of income follows a transactions approach with many, many, many exceptions. D. Congressional definition - IRC Section 61. This basically states that gross income is all income except as otherwise stated. Since this is not too terribly helpful, the Code provides a laundry list of items as examples. See IRC Section 61(a) and page 83-84 of the text. E. Landmark Court Cases. 1. Eisner v. Macomber. (1920 Supreme CT). Income is gain derived from capital, labor, or both provided it be understood to include profit gained through the sale or conversion of capital assets. a. Example 1, p.3.5 (finding money) suggests a broad definition of labor. b. Example 2, p. 3.5 (landlords benefit of lessee improvements) indicates that conversion is broadly interpreted (a transaction – repossession – did take place however). 2. Commissioner v. Glenshaw Glass (1955 Supreme CT). Income is (1) undeniable accessions to wealth (2) clearly realized (3) over which the taxpayer has complete dominion. a. See examples 3 - 7, pp. 3.7, for examples of wealth increases and realization. II. Earned and Unearned Income A. Earned Income 1. Income from services rendered (labor). a. Wages as an employee b. Income from self-employed business. c. Income from other services (legal as well as illegal). 2. Lucas v. Earl (1930 Supreme CT). Income is taxed to those who earn it. The fruit must be attributed to the tree from which it came. a. Examples 8-9, pp. 3.8-9. 3. Clearly realized is not synonymous with cash. That is, the exchange of services or property for other property qualifies under the realization principle. a. Example 10, p. 3.9.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 4. Income method (generally cash or accrual), determines when income is reported. a. Under the cash method of accounting, income is reported when the cash is received from the sale of goods or the rendering of services. b. Under the accrual basis of accounting, income is reported when the goods have been sold or the services rendered. c. See Examples 11-12, p. 3.9 and again observe that property received in lieu of cash will result in income recognition. d. Additional coverage of this topic is in Section IV. Below. B. Unearned Income 1. Income derived from capital such as the following: a. Interest. b.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 7

Chapter 3 11-12 - ACCT 403 CHAPTER 3 FALL 2011 INCOME...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online