Taxable income is computed using one of the two overall accounting methods, the cash method or the accrual method. It is possible to use a combination method that involves using both the cash method and the accrual method.
Different Accounting Methods
Under the cash method, income is reported when it is received and deductions are taken when the expense is paid. The accrual method requires income to be reported when all the events necessary to fix the right to receive payment have occurred and there is reasonable certainty regarding the amount.
It is important to note that it must be reasonable certain that the amount will be paid in a timely manner. If there is substantial doubt, the receivable should not be put on the books and recognized as income.
Tax Liability Calculation
A basic understanding of the method used to calculate the tax liability is computed in the following way:
Start with Gross income
Minus Deductions for Adjusted Gross Income
Equals Adjusted Gross income
Minus The Greater of Itemized Deductions or Standard Deduction
Minus Personal Exemptions
Equals Taxable Income
Times The Tax Rate
Equals Tax Liability
Minus Tax Credits or Prepayments
Equals Net Tax Due or Refund