The principles of accountability and tax liability form a significant area of the legal sector and determine many economic processes at both the local and federal levels. The court case in which Jim Turin & Sons, Inc. and the Commissioner of Internal Revenue are involved as plaintiff and defendant, respectively, is an example of controversy over the tax law and accounting principles (“Jim Turin & Sons,” 2021). The accrual methods and the cash approach described in this case may help assess the proceedings’ outcomes and determine how objectively the plaintiff justified his position. Determining revenue recognition by emphasizing the key points that define this concept will make it possible to describe the result of the hearing and its implications for further precedents.
In the case in question, the cash method of accounting for federal tax purposes is used. As Bankman et al. (2018) note, this principle is to build a relationship between the seller and the buyer when the latter pays the former for the goods or services sold.
Based on the case, the taxpayer reports on the income received independently, but one of the key challenges is a significant difference in time from the moment of receipt of payment until the submission of relevant accounting materials (“Jim Turin & Sons,” 2021). The plaintiff applies this cash method to monitor the overall level of income for a specific period and determine whether the profit is sufficient. In addition, this approach allows the plaintiff to track expenses to obtain a complete financial picture. All profits earned for a specific period are to be included in the tax return. As a result, for the taxpayer, this principle is convenient due to the absence of numerous and frequent reporting operations.
The accrual method of accounting for federal tax purposes is a convenient principle that the plaintiff adheres to in this case. Ahmad (2016) notes that such an approach allows for measuring revenue and expenditures, thereby helping to determine the total share of payments. The merchandising issue raised in the case affects the accrual method since asphalt may be considered a sellable product (“Jim Turin & Sons,” 2021).
The plaintiff’s approach is reasonable and does not contradict the existing tax legislation. Moreover, in conditions of constant turnover of products sold, the accrual method based on accounting for federal tax purposes facilitates all procedures for calculating the expected revenue and the necessary expenses. In this case, the accrual method of revenue reporting is also mentioned, which focuses on reporting directly on revenue (“Jim Turin & Sons,” 2021). However, the method of accounting for federal tax purposes is a more convenient and reasonable form.
The Plaintiff’s Assertion
One of the main arguments used by the plaintiff in the case in question concerned the temporary use of asphalt as a raw material before the sale. The procedures for purchasing and handing over products to the buyer had a minimal time difference due to the compositional features of this material, which began to lose its properties after opening the package (“Jim Turin & Sons,” 2021). As a result, the plaintiff argued that after the product was sold to the buyer, Jim Turin & Sons no longer owned the rights to these goods. In particular, claiming inventory was not the responsibility of the seller since raw materials sold could only be used as intended by the buyer.
The cash method of accounting for federal tax purposes was a justified form of all reporting procedures and did not contradict the existing tax legislation. Therefore, the plaintiff’s assertion was convincing and could not be viewed from the perspective of the need to change the accounting principle.
Revenue Recognition: The Key Points
According to the outcome of the case, the key points determining revenue recognition may be highlighted. As Chen and Liu (2020) state, “the revenue recognition principle requires a firm recognize revenue in the accounting period in which it is earned” (p. 2). Based on the specifics of the case under consideration, one can single out four points that served as incentives and helped conclude the validity of the plaintiff’s arguments.
One of them was a completed transaction, and due to it, the agreement between the seller and the buyer was achieved. Receiving the corresponding income after the completion of the transaction was another revenue recognition criterion. The post-sale value of the revenue was a factor that could also be included as one of the justifications. The fourth point was determining the payment of revenues during the designated period. With all the four conditions met, revenue recognition was achieved.
The analysis of the presented case makes it possible to assess the cash method, the accrual method, and the key points that determined revenue recognition. The plaintiff’s arguments in favor of Jim Turin & Sons’ position were convincing and did not contradict the existing tax legislation. The disagreements that arose were assessed from the perspective of accounting principles and the evaluation of the completed transaction within the framework of the existing merchandising rules.
Ahmad, N. N. (2016). Investigating the factors influencing users’ resistance towards accrual accounting. Procedia Economics and Finance, 35, 17-26. Web.
Bankman, J., Shaviro, D. N., Stark, K. J., & Kleinbard, E. D. (2018). Federal income taxation (18th ed.). Wolters Kluwer.
Chen, N. Y., & Liu, C. C. (2020). Share repurchases and market signaling: Evidence from earnings management. International Review of Finance, 1-22. Web.