This video discusses the difference between book income and taxable income in the United States. Book income is pre-tax financial income that is reported on an accrual basis in accordance with U.S. GAAP (generally accepted accounting principles). Book income is the income that is reported on the financial statements (the Income Statement). Taxable income, on the other hand, is that which is computed for purposes of filing the corporation’s income tax return. There are many differences between book income and taxable income. This is because book income and taxable income have different objectives. Book income measures the change in a corporation’s wealth and is used by investors and creditors to predict the timing and certainty of the firm’s cash flows. Taxable income is computed on a modfied cash-basis and is based on the ability-to-pay doctrine (when a taxpayer receives cash, he or she is able to pay the tax on it even if the revenue hasn’t been “earned”). Taxable income is used to compute the firm’s tax due to raise revenue for the United States government. The differences between book and tax income can be temporary (this means the difference will reverse in a future period) or permanent (this means the difference never reverses).
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This video was funded by a Civic Engagement Fund grant from the Gephardt Institute for Civic and Community Engagement at Washington University in St. Louis.