Chapter IX: Accounting Methods and periods, and filing of income tax returns

Can be found in NIRC Section 43-52; 54-56; 58-59; 65; 67-70; 74-77

I. ACCOUNTING METHODS methods for accounting revenues and expenses:
1. Cash receipts and disbursements method;
2. Accrual method;
3. Installment method;
4. Percentage of completion method; or
5. Crop year basis
Note: a taxpayer can use any one method of accounting but not a combination of two or more method.
Cash method under this method, income is recognized upon actual or constructive receipt of cash or
its equivalent, and expenses are deducted to income only upon actual payment thereof, regardless of
the taxable year when the service is performed or the expenses is incurred.
Accrual Method under this method, the income that is recorded in book are those income earned
although it has not yet been collected and the expenses that were deducted to income are those
incurred although remained to be unpaid (from suppliers, utility co,etc) during the year. In the year that
this income will be collected, it will no longer be reported in succeeding years.
Installment method installment method is a method considered appropriate when collections of the
proceeds of sales and incomes extend over relatively long periods of time and there is 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 during the year.
Percentage of completion method this method is commonly use for a building, installation or
construction contract covering a period of more than one year. Gross income derived from contract may
be reported upon the basis of percentage of completion. Two methods of percentage completion that
can be used:
a. The costs incurred under the contract as of the end of the tax year are compared with the
estimated total to be performed; or
b. The work performed on the contract as of the end of the tax year is compared with the
estimated work to be performed.
Note: the return should be accompanied by a certificate of the architect or engineer. It should show the
gross income and deductions of all expenditures made during the year with proper accounting of
materials and supplies on hand at the beginning and end of the taxable period.
Long term contracts can no longer used completion method but only percentage of completion method
as of Jan 1, 1998.
Crop year method use only for farmers who production of crops takes more than a year from the time
of planting to the gathering and disposal of harvest. Expenses paid or incurred are deductible in the year
the gross income from the sale of the crops is realized. (see Section 166, Rev Regs No. 2)
Tax code provisions prevail over generally accepted accounting principles (GAAP, this are the principles
used by accountants in preparing financial statements) The tax code provision and regulation used in
preparing the taxpayers income tax return and in computing his tax liability will prevail over the GAAP
used by taxpayers in keeping their books of accounts and by external auditors in conducting the
statutory audit and in preparing the audited Financial Statements (FS).
Essentials that a taxpayer may be adopted:
1. The beginning and ending inventories of the merchandise on hand (including finished goods,
work in progress, raw materials, and supplies) should be taken and used in computing the
net income of the year.
2. Expenditures for items of plant, equipment, etc. which have a useful life extending
substantially beyond the year should be charged to a capital account and not to an expense
account; and
3. In case of cost of capital being recovered thru deductions for wear and tear, depletion, or
obsolescence, any expenditure (other than ordinary repairs) made to restore the property
account or charged against the appropriate reserve and not to current expenses. (Section
167, RR No 2)
If Taxpayer accounts for his income on the accrual method, he should also adopt the accrual method in
accounting for this expenses. Thus using hybrid method of accounting is not allowed. (Commission GR
No. L-18843, Aug 29, 1974).
Change in accounting methods: a taxpayer can change from one method of accounting employed in
keeping his book as long as he secure consent of the commissioner of internal revenue to change within
90 days after the beginning of the taxable year to be covered by the return. The application shall be
accompanied by a statement specifying all amounts which would be duplicated or entirely omitted as a
result of the proposed change. Permission to change the method of accounting will not be granted,
unless the taxpayer and the commissioner of internal revenue agree to the terms and condition upon
which change will be affected. (Section 168 Rev Reg No 2)
Inventory of goods or merchandise
Includes Raw materials and supplies on hand acquired for sale, consumption or use in
productive processes
Finished pr partly finished goods
Merchandise which title (owned) is passed to the taxpayer
Inventory goods under contract and goods out upon consignment
Should exclude those already sold to the purchaser but still remain at the hands of the taxpayer
waiting to be shipped out.
Consigned goods should be included by the consignor
Note: inventory of raw materials, goods in process, finished goods, and supplies as of December
31 must be filed with the appropriate Revenue District Office(RDO) not later than January 30 of
the following year.

VALUATION OF INVENTORIES
The bases of valuation most commonly used by business concerns and which meet the
requirements of the Income Tax Law are (a) cost price, or (b) cost or market price, whichever is
lower. Any goods in an inventory which are un-saleable at normal process or unusable in the normal
way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or similar
causes, including second hand goods taken in exchange, should be valued at bona fide selling
prices whether basis (a) or (b) is used, or if such goods consist of raw materials or partly finished
goods held for use or consumption, they should be valued upon a reasonable basis, taking into
consideration the usability and the condition of the goods, but in no case shall such value be less
than the scrap value. Bona fide selling price means actual offering of goods during a period ending
not later than thirty days after inventory date.

Inventories at cost price
Cost means
o In case of merchandise on hand, the inventory price of such goods
o In case of merchandise purchased, the invoice price less trade or other discounts, except
strictly cash discounts, approximate a fair interest rate, which may be deducted or not
at the option of the taxpayer. Net invoice price should be added transportation or other
necessary charges incurred in acquiring possession of the goods.
o In any industry, the usual rules for computation of costs of production are inapplicable,
costs may be approximated upon such basis as may be reasonable and in conformity
with established trade practice in the particular industry.
Farmers and raisers of livestock
Miners and manufacturers who by a single process or uniform series of
processes derive a product of two or more kinds, size or grade,
Retail merchants who use what is known as the retail method in ascertaining
approximate cost.
Inventories at market price
Market price means the current bid price prevailing at the date of the inventory for the
particular merchandise in the volume in which usually purchased by the taxpayer and is
applicable in the cost
Inventories of miners and manufacturers

II. ACCOUNTING PERIOD

Taxable income of a taxpayer is figured on the basis of his annual accounting period.

Income tax returns whether individuals or for corporations, associations or partnerships are
required to be made and their income computed for each calendar year ending December 31
st

of each year. But corporations, associations or partnerships may with the approval of the
Commissioner of Internal Revenue to file their returns and compute their income on the basis of
fiscal year which means an accounting period of twelve (12) months ending on the last day of
any month other than December.

III. FILING OF TAX RETURNS AND PAYMENT OF TAXES


IV. REGULAR FILING OF TAX RETURNS