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.
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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).