ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

Concepts
 For taxations purposes, accounting period refers to taxable year which ordinarily
consist of twelve (12) months. The tax code recognizes two accounting periods,
namely 1) calendar year 2) fiscal years. The term fiscal year means an accounting
period of twelve (12) months ending on the last day of any month other than
December ( Sec.22 [Q], tax code). Calendar year is construed as the period from
January 1 to December 31 inclusive. Ordinarily, calendar year means three
hundred sixty five (365) days except leap year, and is composed of twelve months
varying in length (black’s law dictionary). The latter period is used as the basis if
the tax payer has no annual accounting period, or does not keep books or if the
taxpayer is an individual ( Sex .43 ,Tax Code)
General
 The rule is that taxable income shall be computed upon the basis of the taxpayers
annual accounting period in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer ( Sex . 43 , Ibid )
Methods of Accounting
They are different kinds of methods of accounting namely;
1. Cash basis
2. Accrual basis
3. Hybrid method
4. Crop year basis
5. Installment basis
6. Percentage of completion basis
7. Completed contract basis
Cash Basis
 Cash basis is the method under which income is recorded only when received and
expenses are not deducted until paid out within the taxable year.
Under the cash basis the following taxpayers must report their income
a. Those who keep records the cash receipts and disbursement method
b. Those who do not keeps books and record
c. Those whose books and record are inadequate to reflect their taxable income
Accrual Basis
 Accrual basis is a method of keeping accounts under which income earned is
included in gross income. Whether received or not, and expenses incurred are
allowed as deductions although not yet paid.
Hybrid Method
 Hybrid method is the method of accounting under which the taxpayer reports his
taxable income through the combination of cash and accrual method, or he may
adopt one or the other at his option as in his judgment it clearly reflects his true
income.
Crop Year Basis
 Crop year basis is a method of accounting under which expense in the production
of crops are deducted in the taxable year in which the gross income from crops
have been realized.
Installment Method / Basis (Sec . 49 , tax Code ; Sec. 175 – 176, Revenue Regs. No.2)
 Installment basis is a method under which the taxpayer reports as income only a
part of the gross profit to be realized from the sale / disposal of property on the
installment plan equivalent to that proportion of the amount of the installments
actually received in a taxable year, which the gross profit realized when payment is
completed, bears to the total contract price.

Formula:
Gross Profit/Contract Price X Installment Payments Actually Received = Income to
be reported for the year

Illustrative Problem
 Mr. X owns a residential lot costing ₱200,000. He sold said lot for ₱400,000 on
installment to Mrs. Y payable for a period of eight (8) years at ₱50,000 a year.
Compute the yearly profit of Mr. X for income tax purposes.

Solution:
Contract Price ₱400,000,00
Less:
Cost 200,000,00
Gross Profit ₱200,000,00

₱200,000/₱400,000 X ₱50,000 = ₱25,000.00

₱25,000.00 = Yearly gain to be reported by Mr. X
Real Property
Formula:

Installment payment/Contract Price X tax due = portion of tax payable

Problem:
Mr. M owns a piece of land costing ₱700,000.00. On December 14, 1998, he sold the same
to Ms. L for ₱900,000.00. The terms of payment are as follows
Down payment in 1998 was ₱ 200,000.00
Payment in 1999 350,000.00
Payment in 2000 350,000.00
Compute the capital gains tax to be paid by Mr. M in 1998, 1999 and 2000
Solution:
Capital gains tax Contract Price ₱900,000.00
Selling price =₱900,000.00 Installment payments:
Rate of tax X 0.06 1998 ₱200,000.00
₱ 54,000.00 1999 350,000.00
2000 350,000.00
Computation of annual capital gains tax
1998 ₱200,000.00/900,000 X ₱54,000.00 = ₱ 11,880.00
1999 ₱350,000.00/900,000 X ₱54,000.00 = ₱ 21,060.00
900,000.00
2000 ₱350,000.00/900,000 X ₱54,000.00 = ₱ 21,060.00
Percentage of Completion Basis
 Percentage of completion basis is a method under which gross income already
earned though not yet received based on duly certified estimates of architects or
engineers, is reported in a taxable year and all deductions there from for the same
year, even if not yet paid, are taken into account.
Indirect Methods of Determining Income
 Indirect methods may be utilized to stop and deter the commission of tax evasion as
well as tax avoidance. Toward this and the BIR Commissioner may resort to the
following indirect methods.

A. Percentage of receipts or sales method

B. Net worth method
Excess cash expenditures method
C. Other methods such
1. Reconstruction of income through the use of evidence of business dealings of
taxpayers
2. Examination of customer’s or supplier’s record
3. Examination of records of government agencies
4. Compilation of checks cashed
Percentage of Receipts or Sale Method
 This is an indirect method whereby gross profit is reconstructed by ascertaining
the total sales or receipts and takes the average of gross profit to such sales or
receipts or taxable income to gross income, which average may be taken from
return filed or from figures reflecting gross profit and net profit of business similar
to that of the taxpayer.
Net Worth Method
 This method is otherwise called or referred to as the Net Worth –Expenditures
Method or Inventory. It is based on the accounting formula that an increase in net
worth plus non-deductible disbursements minus non-taxable receipts equals net
income. It is used to determine unreported income basing on the theory that an
increase in net worth, if unreported and unexplained by the taxpayer, comes from
income derived from a taxable source.
Excess Cash Expenditures Method
 Excess cash expenditures basis is a method under which the aggregate yearly
expenditures are deducted from the declared yearly income.