(1) In all cases in which the production, purchase or sale of merchandise of any kind is an income-producing factor, inventories of the merchandise on hand (including finished goods, work in process, raw materials, and supplies) should be taken at the beginning and end of the year and used in computing the net income for the tax year;

(2) Expenditures made during the tax year should be properly classified as between capital and expense. Expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the tax year should be charged to a capital account and not to an expense account; and

(3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion or obsolescence, any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve and not to current expenses.

2.26-51-401(a) Accounting Requirements

Only those methods of accounting which clearly indicate the taxpayer's income will be accepted. All items of gross income and all deductions must be treated with reasonable consistency. All items of gross income subject to taxation shall be included in gross income for the tax year in which they are received by the taxpayer, unless in order to clearly reflect income such amounts are to be properly accounted for as of a different period. See ACA 26-51-404(a)(2). For instance, in a case where it is necessary to use an inventory, no other accounting method with respect to purchases and sales will correctly reflect income except an accrual method. A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restriction. On the other hand, appreciation in value of property is not an accrual of income to a taxpayer prior to the realization of such appreciation through sale or conversion of the property.

1.26-51-401(b) Change in Accounting Methods

If for any reason the method of reporting income subject to tax is changed, the taxpayer shall attach to his income tax return a copy of the Internal Revenue Service certification or approval of the change in accounting method.