A Problem in Expense Recognition.

Abstract The purpose of this article is to add a somewhat different point of view relative to the very interesting and complex problem of accounting for depreciation and income taxes when the depredation for tax purposes is different from the depreciation computed for financial accounting purposes. A problem in financial accounting arises whenever the internal revenue code allows an item to be expensed for tax purposes at a rate or over a period of time different from that which a reasonable accountant would use. There are several possible methods of accounting for this situation. The argument of this paper is that tax computations affect the value of an asset, thus affect the amount of the costs written- off as expenses during the period. The answer to the problem of allocating the cost of an investment to different time periods lies in the recognition that depreciation accounting is tied to expiration of value, and the write-off of an asset for tax purposes changes its value.