Federal Income Taxation-Accounting Methods-Accounting for Prepayments and Estimated Future Expenses

“It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals.” In order to obtain regular periodic revenues from the federal income tax, Congress requires all taxpayers to determine their taxable income annually.

Income may be defined as “value added” as a result of a given economic activity. Logically, the most opportune time to measure income occurs whenever that activity has ended, for at that time the continuous growth or contraction in the attributable value will likewise have ended and the income or loss from the activity will be readily susceptible to measurement. The fragmentation of this period of activity into an annual period, as demanded by Congress, requires an attempt to measure a continuously changing quantum of income. Business activity does not cease and begin anew at the end of each taxable year; thus, some transactions will necessarily span such artificial limits. Consequently, the determination of taxable income requires the implementation of accounting methods which will wholly or partially exclude or include such transactions in the current taxable year.