The Waterbury Democrat., 1945-01-31
YOUR FEDERAL INCOME
 TAX OUR INCOME TAX SYSTEM
METHODS OF ACCOUNTING

Your Federal income tax return may be preared in accordance with any method of accounting which you use regularly and which cor rectly reflects your income and ex- penditures. There are two main methods of keeping accounts, as fol- lows: (a) the cash receipts and dis bursements method and (bJ the ac- crual method. Ordinarily, nearly all individuals use the cash method. The accrual method is used mostly by business concerns.
 In the cash receipts and disburse- ments method all items of taxable income actually or constructiely re- ceived (whether in cash or proper ty or services), and only those those amounts actually paid out for deductible expenses, are shown. The term "cash basis" is frequently used, but leash receipts ard dis bursements" basis more accurately describes this method of account ing.
 Income is 'constructievly" re- ceived when the amount is credited to your account, or set apart for you, and may be drawn upon by you at any time. Thus, under the cash receipts and disbursements method, a bll rendered by taxpayer will not constitute income until paid, nor will bill rendered to the tax payer be expense until paid. Three will, however, be constructive re- ceipt of payment If a valid check is received during the taxable year even though the check may not haV0 been deposited or cashed within that period.
 Under the accrual method, net income is measured in 8 broad sense by the excess of income earned over expenses incurred. Such income arises when earned, even though not received, and deductible expenses arise when incurred, whether paid or not within the taxable period. Thus if you are a storekeeper keeping calendar year books on the accrual basis and you sold goods in Decem- Der, 1914, for which you were not paid until January, 1945, the selling price and cost of those goods should be included in your 1944 return. This will result in the profit or loss on the sale being reported for the year in Wchich the accrual occurred. If you keep books on the cash basis, the expenses should be reported for the year in which they were paid, 1924 or 1945, as the case may be, and the selling price will be included in your return for 1945, the year when 1t was received.
 Where inventories are carried in the business. as in the case of store operations, only the accrual method in reporting purchases and sales will clearly reflect income, and the &C., crual method accordingly should be used. In the case of professional occupation, such as that of lawyer or physician, where inventories are net employed, either th- cash re- ceipts and disbursements method or the accrual method may be employ ed.
 Business expenses must be dis tinguished from capital expenditures. Capital expenditures are those which result in the acquisition of some thing of a permanent nature and do not constitute the current cost of running a business, and, therefore, are not deductible as business ex- penses. While a distinction between a capital expenditure and business expense is often difficult to draw, q gneral rule may be tated which ap- plIcable in most cases: Capital ex- penditures ordinarily result in the acquisition of assets having periods a useful life in excess of one year. where the period of useful life is one year or less, that is. where the asset is worn out and discarded within one year from its purchase, the entire cost is deductible from the income for that year.
 A limitation upon the deductibil- ity of items as bushes expenses is that they must be paid or incurred within the taxable year. If you are on the cash receipts and disburSe- ments basis. then the expenses must be paid within the year; if you are on the accrual method, such ex- penses are allowable only to the ex- tent they were incurred within the year.
 A taxpayer canot avoid the pay ment of income taxes by failing to keep books properly. If he keeps no books. or his books do not clearly reflect his income, then teh law re- quires that his income shall be de- termined by the Commissioner of Internal Revenue in such manner as will clearly reflect his income.