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Accounting Income: Definition, Types & Calculation

Dec 9, 2022

Income plays a major role in how we live our lives—both personally and professionally. We rely on income to provide for ourselves and our families. Typically, we earn income from wages, salaries, interest, and certain dividends.

The definition of income in accounting is all subject to individual circumstances. However, there are rules and guidelines when it comes to financial accounting income. For example, these rules may cover financial statements, income taxes, or selling services. And there can be certain financial ratios to consider.

So, how exactly does accounting income work in South Africa? And what else do you need to know? Keep reading to learn more about types of income, how to calculate it, how it’s taxed, and more!

Table of Contents

What Is Accounting Income?

Types of Income

How Is Accounting Income Calculated?

What Is Taxable Income?

How Is Earned Income Taxed?

Key Takeaways

Frequently Asked Questions

What Is Accounting Income?

Accounting income is the money that an individual or organisation receives in return for their services or goods. Income can have a variety of definitions, which often depend on the specific context. That context may change depending on economic analysis, financial accounting, or taxation.

For most people, total earnings include the likes of wages and salaries, investment returns, and pension payments. For businesses, accounting income refers to a few different scenarios. It could be the money made from selling goods and services. Or it could be interest or dividends paid on the company’s cash holdings and reserves.

Economists use different definitions and methods of measuring income. Their definition of income will be in line with the goal of their research, regardless of where it focuses.

For example, there could be a primary focus on income, savings, consumption, or production. Or they may focus on public finance, capital investment, or other relevant issues and subtopics.

A macroeconomic measure of income is important for sociological and policy research. But people tend to be more concerned with their own personal and business income.

Types of Income

In most cases, there are only 3 main categories of income that taxpayers need to worry about. These are ordinary income, capital gains, and tax-exempt income. Every individual will have varying circumstances, but these are the 3 types of income that are of primary concern.

Ordinary Income

Ordinary income refers to any money earned from working. For example, this can include:

Hourly wages
Salaries
Tips and commissions
Interest from bonds
Income earned from business activities
Certain types of royalties
Unqualified dividends

So, ordinary income is employment income. This is the case if you’re an individual earning a salary or hourly wage. And it’s the case if you’re a business earning revenue from your products or services.

South African residents who earn income from their employment are exempt from paying taxes. This is true only for the first ZAR 1.25 million and if they spent over 183 days outside of South Africa.

Capital Gain

A capital gain refers to a gain that comes from selling an asset that has seen its value appreciate. Different types of capital assets can include bonds, stocks, real estate, and other types of financial instruments.

Capital gains are subject to a maximum effective tax rate of 18% in South Africa. Realised net capital gains are subject to income tax at a rate of 40%.

Individuals can exclude up to ZAR 40,000 per year when calculating net capital gains. However, the annual exclusion amount is then increased to ZAR 300,000 after the individual taxpayer passes away.

Included in South Africa’s tax accounting net are a resident’s foreign capital gains. For non-residents, included are proceeds from the sale of South African immovable property. Also included are ownership stakes in land-rich businesses. Capital gains may also include the assets of a permanent resident of South Africa.

When a South African citizen sells their primary residence, capital gains tax (CGT) will not be due on the first ZAR 2 million. A portion of the exclusion gets utilised if the property was previously leased. This is true also if the property was in part used for commercial purposes.

Tax-Exempt Income

There are certain types of income that are tax-exempt. However, there are several rules and requirements that surround which actual types of income will be exempt. In South Africa, these exceptions are for residents who meet the South African Revenue Service (SARS) requirements.

Some of the most common tax-exempt income include:

Certain amounts of pensions from outside of South Africa (this applies to both non-residents and residents)
Some lump sum payments that come from various life policies
Allowances that an employee gets for employment relocation
Foreign employment income that’s earned by residents (up to a maximum of ZAR 1.25 million with certain time periods that apply)
Various amounts earned or received from tax-free investments
Legitimate bursaries and scholarships
Certain uniform allowances that an employee will receive from an employer

How Is Accounting Income Calculated?

Calculating accounting income can depend on a few things. For example, a business must consider operating expenses, direct expenses, and cash received. All these elements will help account for the total income.

Accounting income is typically calculated as part of the income statement for a business. It all starts with sales revenue earned from selling goods or services. Next, any direct costs associated with producing the goods or services get deducted. You are then left with gross profit.

At this point, any relevant and indirect expenses get deducted. For example, some indirect expenses can include:

Amortisation
Rent
Meals and entertainment
Labour costs
Marketing costs
Professional fees

Once a business performs all these calculations, it will end up with earnings before tax (or taxable income). The final step to calculate accounting income is to deduct the relevant taxes from the earnings before tax.

What Is Taxable Income?

Taxable income is the amount of income the government can impose taxes on. It refers to the amount of income tax you would pay on yearly salaries or wages. The exact amounts will vary depending on the individual or business. Taxable income can come from various sources.

Here are some of the most common forms of taxable income in South Africa:

Certain types and amounts of capital gains
Income from employment (this can include wages, salaries, taxable benefits, bonuses, and overtime pay)
Investment income earned from foreign dividends or interest earned
Certain profits and losses that occur from a trade or business
Any profits or income earned from being a trust beneficiary
Income earned from different types of royalties
Pension income
Annuities
Profits or losses that stem from rentals

There are different levels of income tax you will need to pay depending on how much you earn. For example, individuals younger than 65 who earn more than ZAR 87,300 are liable to pay a tax.

The rates of tax you must pay on taxable income are set by the Parliament of South Africa each year. They’re typically referred to as statutory rates or marginal rates of tax. A sliding scale determines an individual’s tax rate, which in turn causes the tax to rise as taxable income does.

Every year, during the annual budget speech, the Minister of Finance publishes the relevant tax tables. This serves as an announcement for assessed rates.

How Is Earned Income Taxed?

Earned income comes from labour or business activities in a given period. This can include receiving a salary, self-employment income, or receiving certain government benefits.

You should not confuse this with unearned income. This includes inheritances, capital gains, and qualifying dividends.

Unearned income is not taxed the same way as earned income. For non-residents, earned income helps form a small portion of their gross income. This is the case as long as they have some connection to employment in South Africa.

Some income earned by South African citizens who perform their job-related duties abroad is exempt from taxation. This is true for the first ZAR 1.25 million of employment income. And it is only as long as the individual has spent more than 183 days outside of South Africa during any 12-month period.

Key Takeaways

Accounting income is the amount of money earned from providing labour or services and goods sold. The way certain income works will differ depending on how it’s earned. For example, there are some differences when it comes to financial accounting, salaries, and taxation.

Different types of income include salaries, wages, pension distributions, and returns from investments. On the business side, income can stem from interest and dividends earned and revenue that comes from selling a product or service.

Essentially, there isn’t a set and defined definition when it comes to income. The definition can vary depending on the specific and individual context of how it’s earned.

FAQs on Accounting Income

What’s the Difference Between Income and Profit?

Income refers to the total amount of money a person or business earns in a specific period. Profit is the difference between how much one spends and then finally earns from selling a product or service.

What Is Not an Income?

It can depend on the circumstance, but things such as gifts, inheritances, and cash rebates aren’t considered income. Income relates to receiving money in exchange for labour or selling a product or service.

What Is the Formula of Income?

The simplest formula to calculate income is revenues – expenses = income. This can work similarly for businesses, but you would also consider operating expenses.