Differences between tax accounting rules and generally accepted accounting principles have been a source of irritation to accountants, lawyers, and business men generally. Although the regulations interpreting the Internal Revenue laws have long asserted that, “approved standard methods of accounting will generally be regarded as clearly reflecting the income,” court decisions and rulings have undermined the broad principles in the regulations.

The principle area where the rules of tax accounting differed from generally accepted accounting principles was found in the rules applicable to the timing of transactions. They were confined principally to questions of when income should be recognized and when expenses should be deductible. Thus under tax rules income was often held to accrue at the time cash was received free of restrictions, although under accounting principles the time of receipt was not as relevant as the service period involved.

Tax accounting rules did not allow deductions for costs or expenses until all the events had occurred which were necessary to find the amount and the fact of the taxpayer’s liability for payment. Generally accepted accounting principles require that costs and expenses be matched against revenues of the period to which they relate in order to determine net income. If the precise amount of any costs or expenses is not determinable, reasonable estimates must be used. A further major area of divergence occurred in the rules relative to accrual of property taxes. Accounting practice has been to accrue such taxes over the fiscal period of the taxing authority. Tax accounting has required accrual on certain critical dates which differ in various jurisdictions.

Methods for eliminating these divergences have been provided by the 1954 Internal Revenue Code. For the most part the new provisions are elective in order to prevent inequities during the transition period.