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A method of accounting where revenues and expenses are recognized when earned or incurred, regardless of when payment is received or made.
Example: A company provides services to a client in December but doesn’t receive payment until January. The company would still recognize the revenue in December using the accrual method.
Adjusted Gross Income
Gross income minus specific deductions, such as contributions to a retirement plan or student loan interest payments.
Example: An individual has a gross income of $60,000 and deductions of $5,000, resulting in an adjusted gross income of $55,000.
Paying off a debt over time in equal installments. Used for intangible assets such as patents or trademarks.
Example: A company pays $10,000 to register a trademark that it expects to use for ten years. Using straight-line amortization, the company would deduct $1,000 from its taxable income each year for the next ten years.
Anything that a business owns or has a claim to, such as cash, inventory, or equipment.
Example: A company’s assets may include their office space, computers, and bank account.
Profits that arise when an individual or business sells an asset for more than they paid for it.
Example: A business buys stock for $5,000 and later sells it for $7,000, resulting in a capital gain of $2,000.
Treating an expense as an asset, rather than an immediate expense.
Example: A business spends $20,000 on a new delivery van. Rather than recording the full expense in the year of purchase, the business could capitalize it and record the expense over the van’s useful life.
A qualifying child or relative who meets certain criteria and can be claimed as a dependent on a tax return, which may result in a tax deduction or credit.
Example: An individual’s child is under the age of 19 and lives with them for more than half of the year. The child may be claimed as a dependent on the individual’s tax return.
The process of deducting the cost of a long-term asset over time.
Example: A company purchases a $10,000 machine that it expects to use for ten years. Using straight-line depreciation, the company would deduct $1,000 from its taxable income each year for the next ten years.
The costs incurred by a business in order to generate revenue, such as salaries, rent, or supplies.
Example: A company’s expenses may include paying employees, renting office space, and buying materials for production.
The total amount of income earned before any deductions or taxes are taken out.
Example: An individual earns a salary of $60,000 per year, resulting in a gross income of $60,000.
The amount of revenue left over after deducting all expenses.
Example: A business has revenue of $100,000 and expenses of $80,000. The net income would be $20,000.
The percentage of revenue that represents a company’s profit.
Example: A company’s profit margin may be calculated by dividing its profit by its revenue and multiplying by 100.
Return on investment (ROI)
he amount of profit generated by an investment, expressed as a percentage of the initial investment.
Example: If a company invests $10,000 and generates a profit of $2,000, its ROI is 20%.
A range of income levels that are subject to a specific tax rate.
Example: In the United States, the tax bracket for those earning between $40,000 to $80,000 in 2023 is 22%.
An amount withheld from an employee’s paycheck by their employer and paid to the government on their behalf.
Example: An employee earns a gross salary of $50,000 but has $10,000 withheld for taxes, resulting in a net salary of $40,000.
The income generated by an investment, usually expressed as a percentage of the amount invested.
Example: An individual invests $10,000 in a bond that pays a 5% yield. The yield on the investment would be $500 per year.