 Is Gross Receipts determined on a cash or accrual basis?

- Generally, “gross receipts” is determined on a cash basis, so that if an income is received,

actually or constructively, it is already subject to VAT; or simply put, VAT is imposed on
income/deposit/advance payment received regardless of the time or period when it was/is
earned.
 In the accrual method, when is the VAT payable by the Financial Institution?
- If a Financial Institution adopts the accrual method, the VAT is payable only upon actual or
constructive receipt of the income. The FI, being classified as a seller of service, is not liable
to VAT upon accrual of the income
 The term “actually or constructively received amount of income” is equivalent to the
economic benefit derived from the income payment. Actual receipt of income happens
when actual physical possession of the money or property payment takes place whereas
constructive receipt of income occurs when the money consideration or its equivalent is
placed at the control of the person who rendered the service without restrictions by the
payor
 Under the accrual method, can a bank or other FI adjust its VAT payment for income earlier
earned and received but later reversed when this loan becomes nonperforming?
- VAT is payable at the time the income is received. Nonetheless, income collected in advance
and taxed upon receipt but subsequently returned for failure to deliver the required service
shall be treated as a deduction from gross receipts at the time the previously collected
amount is returned.
- Accrual of the interest income in the books of the FI without actual or constructive receipt
thereof is not yet a VAT taxable event.

Accrual basis of Accounting

While the accrual system of accounting provides the most benefits and advantages for companies,
particularly from the perspective of cash flow planning, profitability and financial forecasting, the
recording of income or payments may depend on the particular type of expense or income involved.

Accounts that should be recorded under the accrual accounting system. Here are some of the most
common ones:

1. Sales – goods, must be supported with sales invoices

2. Service Revenues – ensure that there are official receipts

3. Payroll expenses – employee taxes must first be withheld before BIR allows it as an expense

4. Depreciation – as it can take years before the cost is fully recognized

A. Cash Basis is 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. This method of accounting is generally used by taxpayers who do not keep
regular books of accounts.

Under this method, income is realized upon receipt of cash or its equivalent including those
constructively received (such as deposits for the taxpayer’s account by customers) but not including gifts
or donations. Users of cash basis accounting are mostly individuals engaged in business and practice of
profession, professional partnerships and professional service organizations.

B. Accrual Basis is 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.

Under this method, net income is being measured by the excess of income earned during the period
over the expenses incurred. Expenses not being claimed as deductions by taxpayers in the current year
when they are incurred cannot be claimed as deduction from

income for the succeeding year.

Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year. The accrual basis of
accounting is being used by

taxpayers whose nature of business uses inventories since this method of accounting will correctly
reflect income by matching purchases and expenses against sales.

This method is being applied by most medium and large corporations.

C. Installment Basis is 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.