REALIZATION OF INCOME
b. Property received as
When is income is taxable?
The following are important
considerations to discover whether
or not there is income for tax
purposes:
1. Existence of income
2. Realization of income
3. Recognition of income
4. Methods of accounting
EXISTENCE OF INCOME
A primary consideration in
income taxation is that there
must be income before there
could be income taxation.
(Domondon, 2013)
RECEIPTS NOT CONSIDERED AS
INCOME
a. Advance Payments or Deposits
for Payments;
Advances are not revenue of
the period in which they are
received but as revenue of
the period or periods in
which they are earned.
compensation but subject to
forfeiture;
c. Assessments for additional
Corporate Contributions;
d. Increments resulting from
revaluation of property;
Until the revalued property is
disposed of there is no
income realized.
e. Parent’s share in the
accumulated and current equity
on subsidiaries’ net earnings prior
to distribution;
f. Money earmarked for some
other persons not included in
gross income;
g. Money or property borrowed;
Borrowed money has to be
repaid by the debtor. On the
other hand, the creditor does
not receive any income upon
payment because it is
merely a return of capital.
h. Increase in net worth resulting
from adjusting entries (Domondon,
2013)

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REALIZATION OF INCOME
Under the realization principle,
revenue is generally recognized
when both of the following
conditions are met:
a) The earning process
complete or virtually complete
b) An exchange has taken place
(Manila Mandarin Hotels, Inc. v.
CIR, CTA Case No. 5046, March 24,
1997).
NOTE: Mere increase in the value
of property is not considered as
income since it is an unrealized
increase in capital.
Increase in the Net Worth of the
Taxpayer
The increase in the net worth of a
taxpayer is taxable if it is the
result of the receipt by him of
unreported or unexplainable tax
income. However, if they are
merely shown as correction of
errors in its entries in its books
relating to its indebtedness to
certain creditor which had been
erroneously overstated or listed as
outstanding when they had in fact
be duly paid, they are not taxable.
NOTE: If and when there are
substantial limitations or
conditions under which payment is
to be made, such does not
constitute constructively realized.
RECOGNITION OF INCOME
When income considered received
is for Philippines income tax
purposes:
a. If actually or physically
received by taxpayer; or
b. If constructively
received by taxpayer
 a. The taxpayer does not
employ a method for
computing income, or

b. The taxpayer’s method for

accounting does not clearly
refect the income
(Domondon, 205, citing Sec.
43 of NIRC)

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METHODS OF ACCOUNTING

Accounting methods for tax

purposes comprise a set of
rules for determining how
to report income and
deductions.

General Rule: the law does not

provide for a specific method of
accounting to be employed by the
taxpayer.

The law only authorizes the CIR to

employ particular method of
accounting of income where: