- 21 - The purpose of maintaining inventories is to assure that the costs of producing or acquiring goods are matched with the revenues realized from their sale. Hamilton Indus. v. Commissioner, 97 T.C. 120, 130 (1991); Rotolo v. Commissioner, 88 T.C. 1500, 1515 (1987). Inventory accounting accomplishes this by accumulating production or acquisition costs in an inventory account rather than allowing an immediate deduction for the costs when they are incurred. When the related goods are sold, these costs are removed from the inventory account and recorded as costs of sale, which reduce taxable income for the year of sale. The matching principle is fundamental to inventory accounting and is required by the definition of gross income for a manufacturing or merchandising business. Sec. 1.61-3(a), Income Tax Regs. An item is not removed from closing inventory and reflected in cost of goods sold until the income from the item is realized under the taxpayer's method of accounting. Accounting for inventories is governed by sections 446 and 471. Section 446(b) provides that the taxpayer's method of accounting must clearly reflect income in the opinion of the Secretary. Section 471 provides that inventories shall be taken on such basis as the Secretary prescribes and establishes "two distinct tests to which an inventory must conform. First it must conform 'as nearly as may be' to the 'best accounting practice,' a phrase that is synonymous with 'generally accepted accounting principles.' Second, it 'must clearly reflect the income.'"Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Next
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