Why do accountants bother to allocate? It’s a tough enough job determining how much income tax a company owes at the end of any given year so why would an accountant complicate things by attempting to “allocate” portions of taxes to periods other than the ones in which they are coming up as due?
This question has led to countless arguments and debating among accountants and non-accountants, and it has, in general, helped to keep the profession of accounting from being deadly dull. The next couple of blogs I intend to shed light on the reasoning behind some of the theories.
In short and to begin with, the answer to the question “why bother?” can be reduced to a brief statement that we will be elaborating on, but here is the quick of it; “the determination of periodic enterprise income rests upon the process of matching costs with revenue on a logical basis. Such matching is virtually synonymous with accrual basis, rather than cash basis accounting. Therefore, we must allocate. To summarize, the question is: Why isn’t the income tax that we actually have to pay the amount of income tax that should show as our current income tax expense in our income statement? The answer is that the income tax burden must be matched (accrued) with the items of revenue and expense that generate it. To treat the tax as an expense in a given year only because we pay it, or owe it, makes no sense at all”.