Accounting Principles and Taxable Income.

Abstract The concepts of taxable income have been shifted largely by social and economic considerations that are incompatible with the objectives of private accounting in properly matching costs and revenues. Any attempt to legislate private accounting methods in this respect would tend to debase accounting standards and greatly impair confidence in published financial reports. Although last in first out inventory accounting, for example, may properly measure ability to pay income taxes, it may not be the most appropriate method of accounting for changes in the general price levels. Taxable income is a statutory concept that is governed by many provisions of the Internal Revenue Code, Treasury regulations and Court decisions. In general, the code provides that "Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." Taxpayers accordingly are authorized to se either the accrual or cash receipts and disbursement method. The accrual method is prescribed in accounting for inventories but it may be used in combination with the cash method if income and expenses are correctly reflected. The Code also authorizes the election of certain methods of accounting for specific items which may differ from those regularly employed.