Tax Accounting Essay

30821 Words Aug 18th, 2012 124 Pages
After completing Chapter 13, you should be able to:
1. List what are permissible tax years.
2. Explain the requirements for changing a tax year.
3. Identify the available accounting methods.
4. Understand the rules for accounting method changes.
5. Account for the capitalization of inventory costs.
6. Describe long-term contract reporting.
7. Defi ne the installment method of accounting.
The fi rst 12 chapters are presented primarily from the individual taxpayer’s point of view (including self-employed taxpayers). This chapter provides a general discussion of the previous material as it applies to other entities and provides a
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These differences are numerous and may prove substantial in amount.
The variations between taxable income and fi nancial income are so great as to require specialization in taxation as distinguished from fi nancial accounting. The two disciplines, however, are fundamentally related, and tax issues are usually resolved concurrently with the fi nancial accounting issues.
The basic approach of the income tax is to impose a tax on the net result of fi nancial transactions occurring during a fi xed period of time called the tax year. The time for reporting income and deductions thus becomes of vital importance in determining taxable income. Therefore, the Internal Revenue Code provides that taxable income must be computed on the basis of the taxpayer’s tax year and permissible method of accounting.
There are some differences between fi nancial and tax accounting, differences that are attributable to a number of factors. Financial accounting is designed to refl ect the income position of a profi t-seeking taxpayer; the rules of tax accounting not only must have regard for this but also must refl ect the need to raise revenue equitably. Further, the general thrust and purpose of the tax law, to prescribe detailed rules in the interest of certainty, is bound to create confl icts with tailor-made systems designed for particular taxpayers in many

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