Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
TAX.3301-3
ACOUNTING METHODS AND PERIODS
NARANJO/SIAPIAN/GUDANI
OCTOBER 2022
LECTURE NOTES
TAX REPORTING VS FINANCIAL REPORTING
Tax Reporting
Financial Reporting
Source of Rules
Tax Code and other tax laws
PRFS, PAS
Basic reportorial requirements
Returns and its attachments
Audited FS/SMR
Where reported
BIR
SEC, PEZA, BSP, CDA, etc.
TAX ACCOUNTING METHODS
A. Cash Basis - A method of accounting whereby all items of gross income received during the year shall be
accounted for such taxable year and that only expenses actually paid for shall be claimed as deductions
during the year.
B. Accrual Basis - A method of accounting for income in the period it is earned regardless of whether it has
been received or not. In the same manner, expenses are accounted for in the period they are incurred and
not in the period they are paid.
C. Completion of Contract Basis - An accounting method applicable to contractors in the construction of
building, installation of equipment and other fixed assets or other construction work covering a period in
excess of one year.
D. Percentage of Completion Basis - A method applicable in the case of a building, installation or construction
contract covering a period in excess of one year whereby gross income derived from such contract may be
reported upon the basis of percentage of completion.
E. Installment Basis - A method considered appropriate when collections extend over relatively long periods
of time and there is a strong possibility that full collection will not be made. As customers make installment
payments, the seller recognizes the gross profit on sale in proportion to the cash collected.
F. Crop Year Basis - A method applicable only to farmers engaged in the production of crops which take more
than a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred
are deductible in the year the gross income from the sale of the crops are realized.
Revenue Recognition
Expense Recognition
General Rule
The amount of all items of gross The deductions shall be taken
income shall be included in the
for the taxable year in which
gross income for the taxable
"paid or accrued" or "paid or
year in which received by the
incurred", dependent upon the
taxpayer
method of accounting the basis
of which the net income is
computed
Exception:
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Under methods of accounting
permitted under the Tax Code
(see A-F above)
Accounting for LongTerm Contracts
Gross income derived in whole or in
part from such contracts shall report
such income upon the basis of
percentage of completion. The
return should be accompanied by a
return certificate of architects or
engineers showing the percentage of
completion during the taxable year
of the entire work performed under
contract.
‘Long-term
contracts'
means
building, installation or construction
contracts covering a period in excess
of one (1) year.
Installment Basis –
Sales of Dealers in
Personal
Property
(Section 49)
A person who regularly sells or
otherwise disposes of personal
property on the installment plan may
return as income therefrom in any
taxable year that proportion of the
installment
payments
actually
received in that year, which the
gross profit realized or to be realized
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In order to clearly reflect the
income, the deductions should
be taken as of a
different
period.
All expenditures made during the
taxable year on account of the
contract, account being taken of
the material and supplies on hand
at the beginning and end of the
taxable period for use in connection
with the work under the contract
but not yet so applied.
Note: If upon completion of a
contract, it is found that the taxable
net income arising thereunder has
not been clearly reflected for any
year or years, the Commissioner
may permit or require an amended
return.
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TAX.3301-3
EXCEL PROFESSIONAL SERVICES, INC.
when payment is completed, bears
to the total contract price.
Installment Basis –
Casual
Sales
of
Personality
In the case (1) of a casual sale or
other casual disposition of personal
property (other than property of a
kind which would properly be
included in the inventory of the
taxpayer if on hand at the close of
the taxable year), for a price
exceeding One thousand pesos
(P1,000),
or
Sales of Realty
(2) of a sale or other disposition of
real property, if in either case the
initial payments do not exceed
twenty-five percent (25%) of the
selling price
the income may be returned on the
basis and in the manner above
prescribed in this Section (49). See
above
“Initial
payments"
means
the
payments received in cash or
property other than evidences of
indebtedness of the purchaser
during the taxable period in which
the sale or other disposition is made.
Note: Change in accounting period shall be filed within 90 days after the beginning of the taxable year to be
covered by the return.
TAX ACCOUNTING PERIODS
General Rule: The taxable income shall be computed upon the basis of the taxpayer's annual accounting period
(i.e. fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer
Exception: the taxable income shall be computed on the basis of the calendar year under specific circumstances.
Section 43
Taxable year can be calendar or fiscal year
1. Calendar year – the 12-month period ending December 31 and is applicable to:
a. If no such method of accounting has been so employed
b. If the method employed does not clearly reflect the income, the computation shall be made in accordance
with such method as in the opinion of the Commissioner clearly reflects the income
c. If the taxpayer's annual accounting period is other than a fiscal year
d. If the taxpayer has no annual accounting period
e. If the taxpayer does not keep books
f. If the taxpayer is an individual
2. Fiscal period – any 12 months period ending the last day of any month other than December 31st.
Change of Accounting Period
Prior BIR approval is required. Application shall be filed with the CIR thru RDO where the business is registered
within 60 days prior to the beginning of the proposed new accounting period.
Short accounting period may arise in the following cases:
1. death of a taxpayer
2. newly organized business
3. dissolution of a business
4. change in accounting period
END
End of TAX.3301-3
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TAX.3301-3