CONCEPT OF INCOME

Income – is the amount of wealth accumulated plus savings and the value of the personal consumption.
 It refers to all earnings derived from service rendered (labor), from capital (business or investment), or both including gain
derived from sale or exchange of personal or real property classified either ordinary or capital asset.

Net Worth Method

Net worth, ending P xx

Less: Net worth, beginning xx
Increase (Decrease) in net worth P xx
Add: Nondeductible items xx
Total P xx
Less: Nontaxable items P xx
Personal exemptions (for individuals) xx xx
Net taxable income P xx

 Net worth = Total assets minus total liabilities

Return on Capital VS Return of Capital

Income vs Capital vs Revenue vs Receipts

CAPITAL REVENUE RECEIPTS

- denotes the original investment or fund - pertains to all funds accruing to the -are considered cash collected over a
used in order to generate earnings which treasury of the government derived from business period
is called income. tax, donation, grants and any other source

Nontaxable Income – items of income excluded by law or treaty from taxation.

Taxable income – means the pertinent items of gross income specified in the Tax Code less the deductions, if any, and/or personal
and additional exemptions authorized by such types of income by the Tax Code or other special laws.

Characteristics of Taxable Income

1. There must be gain or profit.
2. The gain must be realized or received.
 Income Constructively Received
o Interest credited on savings bank deposit
o Matured interest coupons not yet collected by the taxpayer
o Dividends applied by the corporation against the indebtedness of a stockholder
o Share in the profit of a partner in a general professional partnership, although not yet distributed
o Intended payment deposited in court (consignation)
3. The law or treaty does not exclude the gain from taxation.

Sources of Income

Income Taxpayers
Sources of Income
Resident Citizens / Domestic Corporations Nonresident Citizens / Aliens / Foreign Corporations
Earned:
Within Taxable Taxable
Without Taxable Nontaxable
Partly within and without Taxable Partly taxable
What are the classifications of income?
1. Compensation income
2. Business Income
3. Passive income
4. Capital gains-
-the gain derived from labor, especially from employment such as salaries and
commissions. This is usually subject to normal tax.
- the value derived from an exercise of profession, business or utilization of capital.
Usually subject to normal tax
- an income which the taxpayer merely waits for the amount to come in. Usually subject
to final taxes.
-an income derived from sale of assets not used in trade or business. Generally subject
to capital gains taxes.

Valuation of Income
1. Cash received for income earned
2. Fair value of property received as payment for income earned
3. Fair value (at the date the income was earned) of the share of stocks received as payment of income earned
4. Fair value of the share received (in the absence of any stipulated price) as payment of income earned
5. Fair value of the promissory notes received as payment of income earned
 Face value of the note, if interest bearing
 Discounted value or Present Value of the note, if non-interest bearing

Methods of Reporting Income and Expenses

CASH METHOD vs ACCRUAL METHOD

Accounting Methods Applicable Business Reportable Income Reportable Expenses

CASH BASIS Servicing Business Cash received Cash paid
1. Single proprietorship, except with inventory (earned or (incurred or not
2. General professional partnership unearned) incurred)
3. Leasing / renting business
ACCRUAL BASIS Trading and Manufacturing Businesses Earned (received or Incurred (paid or not
not received) paid)
Exceptions 1. Income constructively received Report
2. Advance / prepaid rent Prorate
3. Prepaid interest (individual taxpayer)
When to report interest expense?
a. No amortization of principal Year when principal
debt is paid
b. With amortization of principal Proportionate to
principal amortization

SPECIAL METHODS

 Installment Method
Reportable Income = Installment collection received x Gross Profit/Contract Price

Important Terms:
1. Selling Price (SP) = Cash received + FMV of property received (if any) + Mortgage assumed by buyer (MAB)
2. Contract Price (CP) = SP + Excess of MAB over Cost (EMABOC) – MAB
3. Initial Payments = Downpayment +Installments received in the year of sale + EMABOC

When to Use Installment Method

1. Installment Sale of Personal Property
a. Regularly sold on an installment basis by a dealer
b. Casual sale on an installment basis subject to the following conditions:
 The selling price exceeds P1,000
 Initial payments do not exceed 25% of the selling price
 If initial payments, considered cash sales
 The property sold is not an inventory
 2. Installment Sale of Real Property
a. Sale of realty (inventory) where the Initial payments do not exceed 25% of the selling price. This sale is subject to
30% corporate taxpayers, 5% - 32% for individual taxpayers.
b. Sale of real property as capital asset, if Initial payments do not exceed 25% of the selling price. This sale is subject
to 6% capital gains tax, based on the Selling Price or Zonal Value, whichever is higher.

 Deferred Payment Method

 Long-Term Construction Contracts
 Gross Income from Farming

Business engaged in farming could derive income from the following sources:
1. Farm products raised

Harvest or product raised at selling price P xxx

Less: Unsold at end of the year (at selling price) xxx
Gross Income from Farm products raised (harvested and sold) P xxx

2. Trading or farm products purchased

Products sold P xxx

Less: Cost of sale xxx
Gain from sale P xxx

3. Other farm income

Methods of Computing Gross Income Derived from Farming

Cash Method Accrual Method
Gross Income from Farm products raised (harvested and sold) xxx xxx
Harvested and unsold at end of the year xxx
Gains from farm products purchased and sold xxx xxx
Other farm income xxx xxx
Total Gross Income xxx xxx

Crop Method

Gross income of crop realized xxx

Less: Entire cost of producing the crop xxx
Income xxx