The sun., 1919-09-14
Accounting in Relation
To the Income ak
It Underlies and Supports the Whole Income Tax
Structure-1ncome Taxation Is Almost Entirely
a Matter of Accounting.
By HOMER CLAIR PACE. p. A.,
Inteyp


make tax payments to the Federal
Government. These payments will
constitute the third instalment OF a
gigantic tax which was voluntarily
reported last spring by citizens and
corporations on an historical or ac-
counting basis-the history of the
business OF the preceding year. The
Individual reported his income, less
certain exemptions. and computed his
tax on the basis OF the taxable in
come. The business concern reported
tts income, actually received or &C
crued to be received, and deducted its
costs and expenses, actually paid or
accrued to be paid, and thus deter
mined a base for the calculation of
income and excess profits taxes. And
the history was not altogether mat
Ter of recording specific facts, for
Judgment had to be expressed in re-
spect to such problematical matters
rs depreciation and depletion. Upon
the completeness Of the record OF
financial transactions OF the year 1918
must depend the accuracy Of the most
stupendous tax levy in the history Of
fhe world.
The historical or accounting basis
for taxes, which requires a complete
and permanent record of business his
tory il comparatively new. Hereto
fore taxes quite generally have been
levied upon an inventory basis-a
listing Of values in hand such as real
estate, personal property, stocks OF
liouor and tobacco, lots OF imported
merchandise and the like. These as
Gets have then been given a value
appraisement for the purpose OF
tax levy on a percentage basis. This
method Is comparatively simple be-
cause of the fact that the tax is
based on specific articles in hand
which can usually be inspected and
appraised
Income and excess profits taxes. on
the contrary, are not based on specihc
values in hand-the tax Is calculated
Upon the basis of a taxable income or
profit earned during a certain elapsed
period of time. The actual property
values may have been consumed even
before the tax is reported nave N
mind a citizen, whose income Is So,ooo
q year, who Is making his September
instalment payment on last years tax
from his September salary. However
improvident this action may be on mis-
rart. II il strictly within his right, be-
cause his tax return, which was hled
last March to cover his income for
last wear. il merely his statement OF
the account between himself and the
Government. The only obligation on
the part Of the citizen Is to meet the
PAYMENTS on his tax account as they
fall due. Similarly. business may
encroach for its tax payments upon
che cash earned and realized in pc
riod succeeding its tax period, al
though business concerns preferably
should reserve, from month to month,
funds for the purpose OF meeting their
TAX obligations when due.
The value transactions. that enter
Into the determination of the tax eN-
tend over the taxable year and. under
the present arrangement, the reporting
and the payment of the tax extend
over another year. The final review
and the determination of the facts by
the Government require at least an
pther year. Three years, therefore,
and In practice probably longer pc
ROD, are required in the determination
and the settlement of the tax, during
which time the only dependable source
n: information is the accounting record
Of income transactions which Is mace
during the taxable year.
Accounting underiies and supports
the whole income tax structure. II
Hnan-
cial transactions in such a way tnat
Income and expenditures-the progress
of the business by years In the matter
Of earnings-may be stated. 1t sup
blies A dependable basis for any action
whether OF a tax or Of a business ma
ture. which basis Is available as long
rs the records are preserved.
The anxieties of taxpayers in the
preparation of their returns and the
dificulsies OF administration on the
mart of Government officials are due
Utmost entirely to defective financial
records. Even the larger and more
successful concerns have often been
tanentably weak In their accounting
procedures and many such concerns
are having their accounts for the last
six or eight years reviewed and au-
thoritatively stated by certified public
Accountants. Partnerships, probably
because of the fact that they have not
been az strictly regulated as corpora
lions, have often been singularly lax
tn respect to financial records. Small
retain traders, professional men and
others whose accounting has not re-
uuired the services of trained book
keeper have, more often than not, kept
no accounts whatever, or, possibly,
pnIy such accounts as affected Gus
toners or clients. The difficulties OF
income taxation have seldom arisen
from antagonism or dishonesty on the
part Of the taxpayer, but almost en-
hrsiy from the lack OF the proper his
toricaI basis upon which to compute
the tax.
Income taxation, therefore. is almost
gntirely a matter of accounting. The
larger business concern, with its con-
troller and staff of booklIeepers, is
rapidly mastering the situation. A
concern OF this class, no matter how
sAclty it's methods NAV have been in
the past. will readily adapt itself to
ths new accounting basis of taxation.
me greatest difficulty, and one that
must be overcome in order to make
thib basis OF taxation effective, Is with
the business concerns, the professional
men and the farmers whose affairs do
not require the organization of a book
keeping department with a technically