The ACCRUAL METHOD is used to calculate a self-employed worker's net income. According to the accepted principles of this accounting method, the income and expenditures of each fiscal period must be accurately recorded for that fiscal period.
The FISCAL PERIOD is the period used by the company for establishing its profit, or the period between two balance sheets. It may be a period of one year or less.
The FINANCIAL STATEMENTS include the balance sheet, statement of profit and loss, statement of changes in financial position and statement of retained earnings. The final result of the statement of profit and loss indicates the net income; it serves as the basis for calculation.
To convert to a MONTHLY BASIS, the net income entered for the preceding fiscal period is divided by the number of months in that period, which involves an assumption that income is constant throughout the year. Although this may not be entirely true, this calculation method is used unless it leads to serious prejudice, because it usually takes an entire fiscal period to determine a businessperson's income with sufficient accuracy.
DEPRECIATION is not included in calculating net income.
REPAYMENT OF PRINCIPAL is not considered an operating expense.