The Waterbury Democrat. [volume] (Waterbury, Conn.) 1917-1946, 1944-01-25
YOUR FEDERAL
INCOME TAX
METHODS or ACCOUNTING

METHODS OF ACCOUNTING
A Federal income tax return may
be prepared in accordance with any
method of accounting regularly
used by the taxpayer which correct
ly reflects his income and expendi.
lures. Two main methods of keep
ing accounts are followed, (a) thu
cash receipts and disbursement;
method and CO. the accrual method
Ordinarily, nearly all Individual
use the cash method. The accrual
method is used mostly by business
concerns.
In the cash receipts and disburseI
ments method all items of incoml
ACTUALLY or CONSTRUCTIVE.
received whether in cash or prop
erty or services), and only thosI
amounts actually paid out for de
ductible expenses, are shown. In
come is "conStructively" receives
when the amount is credited to TIL
account Of, or set apart for the tax
payer, and may be drawn upon b
him at any time. Thus, under til
cash receipts and disbursement
method, bill rendered by the ta2
payer would not constitute incon
until paid, nor would bill rendere
to the taxpayer be expense unit
paid. There would, however, be col.
structive receipt of a payment l
a valid check is received during I'll
taxable year even though the cheo
may not have been deposited II
cashed within that period.
Under the accural method, NJ
income is measured in a broad sem
by the excess of income earned ov{
expenses incurred. Under the a
cural method, income arises whe
earned, even though not received all
deductible expenses arise when ID
Cured, whether paid or not with
the taxable period.
Where inventories are carried
the business, as in the case of Sto|
operations, only the accural meth
in reporting purchases and sal
will clearly reflect income, and tt
accural method accordingly shous
be used. In the case of professiorl
occupation, such as that of a lawy
or physician, where inventories a
not employed, either the cash Il
ceiptS and disbursements method
the accrual method may be Ell
ployed. II
Business expenses must be d
tinguiShed from capital eXpent
lures. Capital expenditures ssl
those which result in the acquiSiti
Of something of a permanent natl
and do not constitute current CT
of running business, and, theI
fore, are not deductible as buSin(
expenses. While a distinction
tween a capital expenditure and
business expense is often dif1c
to draw, general rule may be stat
which is applicable in cost case
Capital expenditures ordinarily 4
suit in the acquisition of assets hei
ing periods of useful life in exc
of one year. Where the period
useful life is one year or less, tt
is, where the asset Is worn out a
discarded within one year from
purchase, the entire cost Is dedu
ible from the income for that We
A limitation upon the deductibil
of items as business expenses is I'll
they must be paid or incurred witt
the taxable year. If the taxpayer
on the cash receipts and disbur
ments basis, then the expenses nj
be paid within the year; if he is
the accrual method, such expen
are allowable only to the extent Il
they were incurred within the We
A taxpayer cannot avoid the pS
ment of income taxes by failing
keep books properly. If he keeps
books, or his books do not cleal
reflect his income, then his inco
will be determined in such NAM
as in the opinion Of the Comm
sioner Of Internal Revenue clea.
reflects his income.