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FABM - QUARTER 2 (NOTES)
Bank Reconciliation Statement
Bank Statement is a report that shows and informs the
account holders of all the bank transactions that occur
generally monthly. It is prepared and sent by the bank
through courier services together with the debit and credit
memos and the cancelled checks for those accounts that
do not have passbooks.
➢ It is normal for a company's bank balance as per
accounting records to differ from the balance as per bank
statement. The difference between these figures is the
reason why companies prepare a bank reconciliation
statement.
Nature of a Bank Reconciliation Statement and Effects
of the Identified Reconciling Items
A Bank Reconciliation Statement is a report prepared to
compare the cash book balance with the bank’s records.
The main purpose is to see if there are any differences
between the balances of these two sets of records for
company’s cash transactions.
➢ The first record which is the company’s record is
based on the ending balance of their accounting
records. This is known as cash book balance.
➢ The second is the bank’s record as reflected on the
bank statement. This is known on as the bank
balance.
➢ It is common for these two records to have
differences in their ending balances. Thus, it is
necessary to prepare the Bank Reconciliation
Statement.
Nature of a Bank Reconciliation Statement
1. It is a process because it involves a series of steps to
arrive at the correct balances of cash.
2. It is a periodic report because it is prepared monthly. It
is prepared at the end of every month after preparing Cash
Book.
3. It contains an explanation of the difference in balances
as per Cash Book and Bank Statement.
4. It is an integral part of cash management and control. It
only deals with cash transactions of the company.
5. It is prepared by the account holder, but it is not legally
compulsory to prepare this statement.
Importance of Bank Reconciliation
1. It helps in the identification of errors in the accounting
records of the company or the bank, such as double
payments, missed payments,
calculation errors, etc.
2. It provides the necessary control mechanism to help
protect the valuable resource through uncovering
irregularities such as unauthorized bank withdrawals,
fraudulent transactions, and theft.
* Segregation of duties:
a. persons responsible for accounting
b. persons authorizing bank transactions
c. persons responsible for preparing bank
reconciliation statements
d. Persons monitoring bank reconciliation
statements.
3. It provides added comfort that the bank transactions
have been recorded correctly in the company’s records.
This is so if the bank balance appearing in the accounting
records is confirmed to be correct as what is indicated in
the bank statement balance.
4. It assists in the regular monitoring of cash flows of a
business, e.g. accounts payable and receivables of the
business.
5. It helps in tracking and adjusting the accounting books
for fees and penalties.
2 common causes of the discrepancy in figures:
1. Time lags that prevent one of the parties (company or
the bank) from recording the transaction in the same
period as the other party.
Example:
A bank statement that ends January 30, 2015 and then the
company were able to collect cash of P20,000 at 5:00 PM.
Bank usually closes at 3:00 PM because of this, the cash
collected will not be reflected in the bank as deposit but it
is however recorded in accounting records of the
company.
2.Errors by either party in recording transactions
a. Bank Errors
These are mistakes made by the bank. Depending on the
errors, these can either increase or decrease the balance
in bank statement. These could include:
➢ the bank recording an incorrect amount, like
transposition (165 instead of 156) and trans placement
(500.00 instead of 5,000.00).
➢ entering an amount that does not belong to a
company's bank statement.
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
➢ omitting an amount from a company's bank statement
(error of omission).
b. Book Errors/ Errors in Cash Account
These are mistakes made by the company. Depending on
the errors, these can either increase or decrease the
balance in company’s book. These could include:
➢ Entering an incorrect amount, such as transposition and
trans placement.
➢ entering a transaction that does not belong in the
account; or
➢ omitting a transaction that should be in the account.
Example:
A check was issued to Meralco by the company amounting
to P1000. The company recorded this as P100. When the
check was presented, the bank paid Meralco P1,000. In
the records of the company, it was P100 while in the
records of the bank it’s P1,000.
Common Reconciling Items
BANK
1. Deposits in transit (ADD TO BANK)
- are amounts already received and recorded by
the company, but are not yet recorded by the bank as of
cut-off period.
Example:
A retail store deposits its cash receipts of August 31 into
the bank's night depository at 10:00 p.m. on August 31.
The bank will process this deposit on the morning of
September 1. As of August 31 (the bank statement date)
this is a deposit in transit.
➢ Because deposits in transit are already included in
the company's Cash account, there is no need to
adjust the company's records. However, deposit in
transit are not yet on the bank statement.
➢ Therefore, they need to be listed on the bank
reconciliation as an increase to the balance per bank
in order to report the true amount of cash.
A deposit in transit is on the company's books, but it
isn't on the bank statement.
2. Outstanding checks (MINUS TO BANK)
- are checks that have been written and recorded in the
company's Cash account but have not yet cleared the
bank account or presented to the bank by the payee.
➢ Checks written during the last few days of the month
plus a few older checks are likely to be among the
outstanding checks.
➢ Because all checks that have been written are
immediately recorded in the company's Cash account,
there is no need to adjust the company's records for
the outstanding checks.
➢ However, the outstanding checks have not yet
reached the bank and the bank statement. Therefore,
outstanding checks are listed on the bank
reconciliation as a decrease in the balance per bank.
Illustration:
On January 29, 2015, Juan issued a check to Maria
amounting to P2,000. The checks was then recorded by
Juan in his books as a deduction to his cash. It so happen
that the bank was closed on that day and Maria was able
to visit the bank and have it encashed on February 1, 2015
only. In the bank statement received by Juan from his
bank ending January 30, 2015, the P2,000 check was not
deducted however it was already deducted in the books of
Juan on January 29, 2015. The P2,000 check is called an
outstanding check.
3. Bank errors
-are mistakes made by the bank. Bank errors could
include the bank recording an incorrect amount, entering
an amount that does not belong on a company's bank
statement, or omitting an amount from a company's bank
statement.
➢ The company should notify the bank of its errors.
Depending on the error, the correction could increase
or decrease the balance shown on the bank
statement.
➢ Since the company did not make the error, the
company's records are not changed.
BOOK
Debit Memos: (deductions charged by the bank from the
account of the depositor)
4. Bank service charges (MINUS TO BOOK)
- are fees deducted from the bank statement for the
bank's processing of the checking account activity.
Examples:
- accepting deposits
- posting checks
- mailing the bank statement
- pinoy bank has deducted P500.00 from ABC store’s
account for service charge.
➢ Other types of bank service charges include the fee
charged when a company overdraws its checking
account and the bank fee for processing a stop
payment order on a company's check.
➢ The bank might deduct these charges or fees on the
bank statement without notifying the company. When
that occurs, the company usually learns of the
amounts only after receiving its bank statement.
Because the bank service charges have already been
deducted on the bank statement, there is no
adjustment to the balance per bank.
➢ However, the service charges will have to be entered
as an adjustment to the company's books. The
company's Cash account will need to be decreased
by the amount of the service charges.
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5. NSF check (MINUS TO BOOK)
- is a check that was not honored by the bank of the
person or company writing the check because that
account did not have a sufficient balance. As a result, the
check is returned without being honored or paid.
9. Errors (ADD or MINUS)
- in the company's Cash account result from the company
entering an incorrect amount, entering a transaction that
does not belong in the account, or omitting a transaction
that should be in the account.

➢ NSF is the acronym for not sufficient funds. When
the NSF check comes back to the bank in which it
was deposited, the bank will decrease the checking
account of the company that had deposited the check.
The amount charged will be the amount of the check
plus a bank fee.
➢ Because the NSF check and the related bank fee
have already been deducted on the bank statement,
there is no need to adjust the balance per the bank.
However, if the company has not yet decreased its
Cash account balance for the returned check and the
bank fee, the company must decrease the balance
per books in order to reconcile.
➢ Since the company made these errors, the correction
of the error will be either an increase or a decrease to
the balance in the Cash account on the company's
Books.
3 METHODS OF PREPARING BANK RECONCILIATION
a. ADJUSTED BALANCE METHOD
-the balances per bank and per book are separately
determined.

6. Check printing charges (MINUS TO BOOK)

- occur when a company arranges for its bank to handle
the reordering of its checks. The cost of the printed checks
will automatically be deducted from the company's
checking account.

➢ Because the check printing charges have already

been deducted on the bank statement, there is no
adjustment to the balance per bank.
➢ However, the check printing charges need to be an
adjustment on the company's books. They will be a
deduction to the company's Cash account
b. BOOK TO BANK METHOD
Credit Memos: (amount added by the bank to the account -the book balance is adjusted to agree with the bank
of the depositor) balance.

7. Interest earned (ADD TO BOOK)

- will appear on the bank statement when a bank gives a
company interest on its account balances.

➢ The amount is added to the checking account

balance and is automatically on the bank statement.
Hence there is no need to adjust the balance per the
bank statement. However, the amount of interest
earned will increase the balance in the company's
Cash account on its books.

8. Notes Receivable (ADD TO BOOK)

- are assets of a company. When notes come due, the
company might ask its bank to collect the notes receivable.
For this service the bank will charge a fee. c. BANK TO BOOK METHOD
-the bank balance is adjusted to agree with book balance.
➢ The bank will increase the company's checking
account for the amount it collected (principal and
interest) and will decrease the account by the
collection fee it charges. Since these amounts are
already on the bank statement, the company must be
certain that the amounts appear on the company's
books in its Cash account.
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General procedures in preparing the reconciliation
1. Determine the balance per book and the balance per
bank.
2. Trace the cash receipts to the bank statement to
ascertain whether there are deposits not yet
acknowledged by the bank.
3. Trace the checks issued to the bank statement to
ascertain whether there are checks not yet presented for
payment.
4. The bank statement should be examined to determine
whether there are bank credits or bank debits not yet
recorded by the depositor.
5. Watch out for errors. Errors are reconciling items of the
party which committed them
BANK RECONCILIATION
Adjusting Entries
➢ Once the bank reconciliation is done, the next step is to
prepare adjusting journal entries for the adjustments to
accounting records.
➢ Be reminded that some transactions do not need
adjusting entries, like deposit in transit and outstanding
checks which are in bank’s records.
➢ Only items in the company’s book need an adjustment.
➢ The journal entries are intended to correct any errors
and update entries in the accounting records of the
company, specifically the Cash in Bank account found in
the Statement of Financial Position.
➢ In addition, these adjusting entries are done only in the
book side, since the company cannot do any changes in
the bank side.
➢ Reconciling items are not reflected in bank records.
Thus, the company can only make notification for errors, if
there is, to the bank after the reconciliation procedure.
Illustrative Example:
Sweet Foods, Inc. is closing its books and must prepare a
Bank Reconciliation Statement. The following are the
information provided by Sweet Foods, Inc.:
1. Bank statement contains an ending balance of
₱400,000 on July 31, 2019, whereas the company’s books
show ending balance of ₱376,340.
2. Bank statement contains a ₱1,000 service charge for
operating the account.
3. Bank statement contains interest income of ₱550.
4. A note receivable of ₱15,500 was collected by the bank.
5. The company deposited ₱15,000 but this did not appear
on the bank statement.
6. A check with the amount of ₱3,500 issued to PLDT was
misreported in the cash payments journal as ₱3,000.
7. A check of ₱890 deposited by the company has been
charged back as NSF.
8. The company issued checks of ₱25,000 that have not
yet been cleared by the bank.
Preparation of Adjusting Journal Entries
▪ The reconciling items such as credit memo should be
added to the book balance.
▪ Hence, there is a need for the company to prepare an
adjusting journal entry for the notes receivable collected by
the bank in behalf of the company and the interest
received.
Cash…………………………...₱15,500.00
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Notes Receivable……………………..₱15,500.00
To record the amount of the notes collected by
the bank.
Cash………………………..……....550.00
Interest Income…………………….……..550.00
To record the interest earned credited by the
bank.
While reconciling items such as debit memo, NSF and
book error should be deducted from the unadjusted book
balance.
Bank Service Charge……………1,000.00
Cash………………………….………….1,000.00
To record the service charge debited by the bank.
Accounts Receivable………...890.00
Cash……………………….……….890.00
To record the NSF customers checked returned
by the bank
Communication Expense (PLDT)..500.00
Cash………………………..………..….500.00
To record the error in committed in the
company’s books.
Taxation Part 1
A. Definition of TAXATION
“taxation” Latin word “taxationem” which means “a rating,
valuing, or appraisal”
- the process or means by which the sovereign, through its
law-making body, raises income to
defray the necessary expenses of government.
- cited by Atty. Hector De Leon (American Jurisprudence)
Taxation is the process by which the government collects
revenue in order to pay for its expenses.
Taxes are revenue of the government that funds
government expenditures and programs
TAXES
- are the amount collected from the constituents by virtue
of the taxation power of the state.
- it is an involuntary fee or charge that is required
from individuals, corporations, or properties.
- failure to pay taxes is punishable by law.
Governing tax law in the Philippines is the
National Internal Revenue Code of 1997.
Bureau of Internal Revenue (BIR) is the
primary implementing agency in charge of
tax collections.
B. Nature of Taxation
1. Inherent in sovereignty
- the power is inherent as an incident necessary to
the existence of every government.
2. Legislative
- known as the Congress, it makes laws to limit the
power of taxation. Taxes created by law-makers
(i.e. Congressmen and Senators) are generally
called national taxes.
Local Government Units (LGU) are expressly
granted powers to tax those within their local
territories, classified as local taxes and are
applicable only to those who reside within the
boundaries of the LGU’s authority.
3. Subject to constitutional and inherent limitations
“the power to tax involves the power to destroy”
Some inherent limitations:
1. Tax must be imposed for a public purpose;
2. Limited to only those within the taxing state’s
territory;
3. Exemption of the government entities performing
governmental functions from taxation;
4. The state cannot tax the property of foreign
sovereigns
C. Purpose of Taxation
“Always a public purpose”
1. Revenue or Fiscal Purpose – used to provide for
various public services to promote the welfare of
the people.
2. Non-Revenue or Regulatory – used to regulate the
behavior of people towards a particular purpose the gov’t.
seeks to achieve.
Secondary to raising funds, taxation is
also used for the following:
a. To provide incentive and support to small-scale and
start-up businesses through tax exemptions.
b. To protect domestic and local industries against foreign
competitions through imposition of custom duties and
tariffs on imported goods;
c.To reduce inequalities in wealth and income of
individuals and businesses by imposing higher taxes to
those who earn more and imposing less taxes to those
who earn less (progressive taxation);
d. To prevent inflation by increasing taxes or ward off
depression by decreasing taxes.
Theory and Basis of Taxation
Lifeblood Doctrine
▪ constitutes the theory of taxation which states that the
existence of a government in every state is a necessity
and the government cannot continue to exist without the
means to defray its expenses.
▪ Therefore, the government has the rights to compel its
citizens to contribute in order to preserve the state’s
sovereignty and safety.
▪ This theory is also known as the necessity principle.
The basis of taxation is founded on the reciprocal duties of
protection and support between the state and its people.
▪ In return for the taxpayer’s contribution, he/she
enjoys the privileges and protection granted to
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
him/her by the government. This is the so-called
benefits-received principle or the reciprocity
principle.
PRINCIPLES OF A SOUND TAX SYSTEM
➢A tax system of any state is a complex system
composed of different laws, guidelines, and rules to follow.
➢Countries around the world implement different tax
systems based on their needs and fiscal requirements.
However, the different tax systems share common
principles
Basic principles of a sound or a good tax system may
be summarized in three crucial points:
Fiscal Adequacy
➢this means that the sources of revenue and funds
should be sufficient to meet the requirements and
demands of government spending and public
expenditures.
➢in theory, the government must not incur any deficit as a
budget deficit will paralyze the government’s ability to
deliver the essential public services to its people
1. Theoretical Justice
➢also known as equality, the tax burden imposed to the
taxpayer should be based on his/her ability to pay
➢it also suggests that the taxing system must not be
oppressive, unjust, and confiscatory.
2-Important concepts of this principle
a. Horizontal equity means that taxpayers in similar
financial condition or taxpayers who earn the same level of
income should pay the similar amount of taxes.
b.Vertical equity means that taxes levied should be
applied in proportion to the earning capacity of the
taxpayers. Taxpayers earning more should pay more than
those earning less.
2. Administrative Feasibility
➢ the tax laws should be capable of convenient, just and
effective administration. As such, the tax laws must be
clear and easily understood, capable of uniform
enforcement, and convenient as to time, place, and
manner of payment.
➢ levying of taxes should not create any inconvenience to
the taxpayer. For instance, the Bureau of Internal Revenue
implements the electronic Filing and Payment System
(e-FPS) and eBIR Forms in order to improve efficiency and
give convenience when paying taxes.
Lesson No. 2
DEFINITION PROCESS, AND PRINCIPLES OF
INCOME TAXES & BUSINESS TAXES
➢ Taxpayers earn different types of income and the
treatment for each income also varies.
➢ The tax rate for each income category also varies.
➢ This will all depend on the classification of the taxpayers
and their respective income category.
Taxes imposed in the Philippines
1. Income Tax- e.g. Regular, MCIT, Capital Gains
Tax, Final Income Tax
2. Business Tax – e.g VAT, OPT, Excise Tax
3. Transfer Tax – e.g. Estate Tax, Donor’s Tax
4. Documentary Tax – e.g. DST
Passive Income
▪Interest income earned from the bank in general – 20%
of gross earnings
▪Royalty income in general – 20%; except royalty for
literary works of individual taxpayer – 10% of gross
earnings
▪Dividend income of individuals – 10% of gross earnings;
dividend income of corporation – tax exempt in general
▪Winnings in general – 20% of the gross earnings.
1. INCOME TAX
➢ is a tax computed based on a person’s income/profit
arising from property, practice of profession, employment,
or trade or business
➢ is generally considered as a privilege tax. It is not levied
on the person, property, funds, or profits as
such but on the right or the privilege of the person to
receive compensation, income, or profit
➢ is usually based on the annual or yearly income of the
taxpayer.
PRINCIPLES - Income Taxation
Regular income taxation applies to all items of income
except those that are subject to final tax, capital gains tax,
and special tax regimes. According to Section 23 of the
NIRC, the following are the general principles of Income
Taxation in the Philippines:
1. A citizen of the Philippines residing therein is taxable
on all income derived from sources within and without
the Philippines.
2.A nonresident citizen is taxable only on income derived
from sources within the Philippines.
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
3. An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas contract
worker is taxable only on income derived from sources
within the Philippines: Provided, that a seaman who is a
citizen of the Philippines and who receives compensation
for services rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract
worker.
4. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on all income
derived from sources within and without the Philippines
6. A foreign corporation, whether engaged or not in
trade or business in the Philippines is taxable only on
income derived from sources within the Philippines.
Classification of Income Tax
a. Individual Income Tax
➢ is the tax paid by persons earning compensation
income, business or professional income, or passive
income
b.Corporate Income Tax
➢is the tax paid by corporations (both domestic and
foreign) which conduct business in the country
➢this is a tax computed on their yearly profits
➢a corporation is a separate juridical entity created by
operation of law and is granted some of the rights and
privileges of a human being
2. BUSINESS TAX
➢is a tax levied on the privilege to enter into business
➢usually forms part of the selling price or the cost of the
product or item sold
➢this is sometimes referred to as sales tax and includes:
Principles- Business Taxation
1. Any person who in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be
subject to the value-added tax (VAT).
➢ There shall be levied, assessed, and collected on every
sale, barter or exchange of goods or properties, value
added tax equivalent to twelve percent (12%) of the gross
selling price or gross value in money of the goods or
properties sold, bartered, or exchanged, such tax to be
paid by the seller or transferor.
2. Any person whose gross sales or receipts are below
the ₱3,000,000 is thresh exempt from the payment of
value-added tax.
➢ Any person who is not a VAT registered person shall
pay a tax equivalent to three percent (3%) of his/her gross
quarterly sales or receipts: Provided, that cooperatives,
and beginning January 1, 2019, self-employed and
professionals with total annual gross sales and/or gross
receipts not exceeding Five hundred thousand pesos
(₱500,000) shall be exempt from the three percent (3%)
gross receipts tax herein imposed
3. Excise taxes apply to goods manufactured or produced
in the Philippines for domestic sales or consumption or
for any other disposition and to things imported as well
as services performed in the Philippines.
➢ The excise tax imposed herein shall be in addition to
the value-added tax imposed under Title IV. Excise taxes
are generally paid by the producer or manufacturer of
domestic or local articles, or by the importer or owner in
case of imported goods.
➢ Excise taxes are imposed on specific products such as
alcohol products, tobacco products, petroleum products,
minerals and mineral products, automobiles and other
motor vehicles, and non-essential goods.
1. Value –added tax (VAT)
➢ is a business tax imposed and collected from the seller
in the course of trade or business
➢ is levied repeatedly at every point of sale until it
ultimately reaches the final consumer. It is an indirect tax
so it can be passed on to consumers
➢ in the Philippines, the VAT is usually computed at 12%
and is mostly included in the selling price of the goods or
services
BIR Form 2550M - Monthly Value-Added Tax
Declaration
When to File/Pay?
VAT-Manual Filing
- Not later than the 20th day following the end of each
month Through Electronic Filing and Payment System
(eFPS)
2. PercentageTax
➢ is a business tax imposed on businesses with gross
annual sales and/or receipts not exceeding ₱3,000,000
and businesses that are not VAT registered or are
VAT-exempt
➢ this is computed at 3% of the gross sales or gross
receipts.
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
➢ When to File/Pay?
Within twenty-five (25) days after the end of
each taxable quarter
➢ BIR Form 2551Q - Quarterly Percentage Tax Return
Note:
"No payment" returns filed late will result on imposition by
the RDO of penalties, which shall be paid at the concerned
AAB.
3. Excise Tax
➢ is a business tax on the production, sale or
consumption of a commodity in a country
➢ it applies to goods manufactured or produced in the
Philippines for domestic sale or consumption or for any
other disposition and to imported goods
MAJOR CLASSIFICATION OF EXCISABLE ARTICLES
AND RELATED CODAL SECTION
1.Alcohol Products (Sections 141-143)
a. Distilled Spirits (Section 141)
b.Wines (Section 142)
c. Fermented Liquors (Section 143)
2. Tobacco Products (Sections 144-146)
a. Tobacco Products (Section 144) b
b.Cigars & Cigarettes (Section 145)
c. Inspection Fee (Section 146)
3. Petroleum Products (Section 148)
4. Miscellaneous Articles (Section 149-150)
a.Automobiles (Section 149)
b.Non-essential Goods (Section 150)
c.Non-essential Service (Section 150-A) - RA 10963
[TRAIN Law))
d.Sweetened Beverages (Section 150-B)-(RA 10963
[TRAIN Law])
5. Mineral Products (Sections 151)
➢Excise taxes are imposed on specific products such as
alcohol products, tobacco products, petroleum products,
minerals and mineral products, automobiles and other
motor vehicles, and non-essential goods.
➢In addition, by virtue of RA 10963 or the TRAIN Law,
sweetened beverages (such as juice and soft drinks) and
invasive cosmetic procedures are now subject to excise
tax.
➢Excise taxes apply to goods manufactured or produced
in the Philippines for domestic sales or consumption or for
any other disposition and to things imported as well as
services performed in the Philippines.
➢ The excise tax imposed herein shall be in addition to
the value-added tax imposed under Title IV.
➢Excise taxes are generally paid by the producer or
manufacturer of domestic or local articles, or by the
importer or owner in case of imported goods.
Excise tax may either be:
a.Specific excise tax based on weight, volume capacity,
or any other physical unit or measure
b. Ad valorem excise tax based on the assessed value of
an item, good or Commodity
TIME OF PAYMENT:
In General
➢ On domestic products before removal from the place of
production
➢ On imported products before release from the customs’
Custody
Taxation Part 2
➢The government has the right to collect as much taxes
as it wants as long as it is necessary, justifiable, and
constitutional.
➢Taxation has two aspects: levy and collection.
➢Levying or imposition of the tax requires legislative
intervention.
➢As such, in the Philippines, it is the duty of the Congress
to levy taxes.
➢Collection of the tax levied, on the other hand is an
administrative function. It includes assessment and
determining the taxes payable of the taxpayers as well as
the collection of the corresponding payments.
STEPS in computing for income tax due:
1. Classify the taxpayers according to their citizenship,
residence as well as their sources of income – whether
from within the Philippines or outside–because not all
individual taxpayers are taxed on all their income.
The following are the classifications of the individual
taxpayers:
1. Citizens
Under the Constitution, citizens are those:
✓ who are citizens of the Philippines at the time of
adoption of the Constitution on February 2, 1987;
✓ whose fathers and mothers are citizens of the
Philippines;
✓ born before January 17,1973 of Filipino mothers who
elected Filipino citizenship upon reaching the age of
majority; and
✓ who are naturalized in accordance with the law
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
Citizens can be further classified into:
a. Resident citizen –a Filipino citizen residing in the
Philippines
b. Non-resident citizen –a Filipino citizen who is not
physically residing in the country during the taxable year,
due to immigration or employment, or any other reasons
2. Alien
a. Resident alien - an individual residing in the Philippines
but is not a citizen thereof
b. Non-resident alien - an individual who is not residing in
the Philippines and who is not a resident thereof
After classifying the taxpayers, the following general rules
for individual income taxpayers apply:
To determine the income tax due of any
taxpayer, the following steps are to be followed:
Step 1. Identify the classification of the taxpayer.
➢ In the illustration, it was mentioned that Ms. San
Pedro is a resident citizen. Thus, the classification of the
taxpayer is a resident citizen. In which case, she is taxable
on her income within and without.
Step 2. Determine the sources of income of the
taxpayer.
➢ Using the same illustration, the sources of income of
Ms. San Pedro is purely compensation income.
Step 3. Add all the gross income/earnings/receipts
(derived from different sources, if applicable) of
the taxpayer to arrive at the total compensation
income.

In the case of Ms. San Pedro, the following are her gross
income:

2. Determine the gross income of the taxpayer.

Gross income may be derived mainly (but not limited

to) from three (3) sources:
1. Compensation income or remunerations earned under
an employer-employee relationship such as salaries,
wages, bonuses and other benefits;
2. Business income or income arising from habitual
engagement in any commercial activity involving regular
sales of goods or services;
3. Non-operating income which involves all other incomes
that do not fall under the previous two categories such as
gains from dealing with properties, passive income not Step 4. Determine the taxable income of the taxpayer
subject to final tax, casual or one-time income, etc. by deducting the mandatory contributions (to SSS,
GSIS, Philhealth, and Pag-IBIG) and the non-taxable
The computations presented herein is pursuant to Tax income (13th month pay and other benefits) of the
Reform for Acceleration and Inclusion (TRAIN) law or RA taxpayer from the Total Compensation Income.
10963 which was signed into law last December 19, 2017.

3 Types of Individual Taxpayers

1. Purely from compensation income
2. Income from business (selfemployed) and or
professionals
3. Mixed income earner
Illustration 1. *Non-taxable income refers to additional compensation
Rosario San Pedro, single and a resident citizen, is a (aside from basic salary) received by an employee which
minimum wage earner (MWE) with a gross compensation includes 13th month pay and other bonuses/benefits
income for the year 2018 of ₱180,000. She works as a which should not exceed the exclusion threshold of
finance assistant of BIG Corporation in the Philippines. In ₱90,000. Any amount in excess of the exclusion threshold
addition to her basic salary, Ms. San Pedro also earned a shall be subject to income tax.
13th month pay of ₱15,000, overtime pay amounting to
₱100,000, night shift differential of ₱30,000, and holiday Step 5. Compute for the income tax due/liability of the
pay of ₱25,000. Ms. San Pedro also paid for her taxpayer (using the tax table).
mandatory contributions in Social Security System (SSS),
Philhealth, and Pag-IBIG, for a total of ₱6,000. How much Tax Due: EXEMPT
is her taxable income and income tax due?
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
Compute for the taxable income and income tax due of Mr.
Gantimpala.

Since Mr. Gantimpala is not a minimum wage earner, his

income is subject to income tax. To compute for his
The final step is to compute for the income tax payable of income tax due, we will use the following tax table as
the taxpayer using the table as provided in RA 10963. provided by RA 10963.

However, in our illustration, Ms. San Pedro has no income

tax due as she is exempted from income tax because she
is a minimum wage earner.

With the implementation of RA 10963 (TRAIN Law), the

Bureau of Internal Revenue (BIR) issued Revenue
Regulations (RR) No. 11-2018 which provides that for
minimum wage earners, their statutory minimum wage,
holiday pay, overtime pay, night shift differential pay, and
hazard pay shall be exempt from income tax and
withholding tax.
Therefore, the income tax payable of Mr. Gantimpala
Additional compensation such as commissions, honoraria, is ₱29,865.
fringe benefits, benefits in excess of the mandatory
non-taxable amount of ₱90,000, taxable allowances, and
other taxable income earned by a minimum wage earner Taxation Part 3
shall, however, be subject to withholding tax using the
revised withholding tax table under the TRAIN Law.
Tax Reform for Acceleration and Inclusion (TRAIN)
Illustration 2. ➢ Act Tax Reform for Acceleration and Inclusion
Mr. Jose Gantimpala, 33, Filipino, single, is a regular (TRAIN) Act, officially cited as Republic Act No.
employee of Wise Marketing. He receives an annual 10963, is the initial package of the Comprehensive
salary of ₱300,000. For 2019, he also earned an overtime Tax Reform Program (CTRP) signed into law by
pay of ₱50,000 and hazard pay of ₱57,250. He also President Rodrigo Duterte on December 19, 2017.
received his 13th month pay of ₱25,000 as well as other
benefits amounting to ₱72,000. Tax Reform for Acceleration and Inclusion (TRAIN) Act
His mandatory contributions are as follows: TRAIN consists of revisions to the National Internal
Revenue Code of 1997, or the Tax Code.

This reform includes packages that make changes in

taxation concerning the:
▪ Personal Income Tax (PIT),
▪ Estate Tax,
▪ Donor’s Tax,
▪ Value Added Tax (VAT),
▪ Documentary Stamp Tax (DST) and
▪ Excise Tax of petroleum products, automobiles,
sweetened beverages, cosmetic procedures, coal, mining
and tobacco.
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
BUSINESS TAX
-is the tax imposed on the right or privilege to engage in an
onerous transfer of goods or services in the normal
conduct of business.
-Transfers arising from the conduct of business will give
rise to both business tax and income tax.
Business Income
➢ The tax payments of a business organized as a sole
proprietorship are made in the name of its owner.
➢ The owner is considered an individual taxpayer
who derived income from business. He is required
to file BIR Form 1701.
➢ Businesses may settle their income tax liabilities and
submit their income tax returns (tax form) to the
government three months and fifteen days from
the close of the year.
➢ For a business that follows a calendar year, the date
of settlement is April 15.
▪ The prominent feature of the tax reform is that people
who earn ₱250,000 annually or ₱21,000 monthly and
below are exempted from paying Personal Income Tax
(PIT).
▪This includes minimum wage earners, who were also
exempted in the former tax system.
▪On the other hand, those earning over ₱250,000 have tax
rates following a set PIT schedule.
➢Essentially, greater income is taxed at higher tax rates.
➢This denotes that low to middle incomeearners get to
have a higher take home pay, while high income-earners
have a bigger contribution to tax revenues.
➢Increase in consumption taxes intend to
counterbalance PIT tax exemptions.
Tax Rules for Self-Employed and Professionals
(UPDATE May 2018):
▪The BIR has released a new Revenue Memorandum
Order covering the availment of 8% tax rate for
self-employed and professionals.
▪Here are relevant items on taxation of Self-Employed and
Professionals from BIR’s RR 8-2018:
“Individuals earning income purely from self-employment
and/or practice of profession whose gross sales/receipts
and other non?operating income does not exceed the
value-added tax (VAT) threshold (₱3,000,000) as provided
under Section 109 (BB) of the Tax Code, as amended,
shall have the option to avail of:
a. The graduated rates under Section 24(A)(2)(a) of the
Tax Code, as amended; OR
b. An eight percent (8%) tax on gross sales or receipts and
other non-operating income in excess of two hundred fifty
thousand pesos (₱250,000.00) in lieu of the graduated
income tax rates under Section 24(A) and the percentage
tax under Section 1 16 all under the Tax Code, as
amended.
➢ Taxable income for individuals earning income from
self-employment/practice of profession shall be the
net income, if taxpayer opted to be taxed at
graduated rates or has failed to signify the
chosen option.
➢ However, if the option availed is the 8% income tax
rate, the taxable base is the gross sales/receipts
and other non-operating income.”
What are the implications of availing of the 8% Tax
Rate?
The eight-percent (8%) tax rate filers should take note of
the following:
➢ You are no longer required to file and pay Percentage
Tax (BIR Form 2551Q);
➢ You are not required to attach your financial statements
when filing your annual income tax return;
➢ You are no longer allowed to deduct expenses incurred
by the business.
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
Formula for computing your income tax based on the 8%
tax rate, depending on taxpayer type:

For self-employed individuals earning income solely

from business and/or profession:
Income tax due = 8% x [Gross sales or receipts +
Non-operating income – ₱250,000]

For mixed income-earners:

Income tax due = [8% x Gross sales or receipts +
Non-operating income] + Tax due on compensation
income (based on graduated tax rates)

➢To compute the tax due, you only need to multiply the
8% tax rate by the total gross sales or receipts minus
₱ 250,000.00.
➢Moreover, choosing the 8% tax rate would exempt you
from paying the 3% Percentage Tax (now 1% until 2023).
Sample Computation: Illustration 1
Ms. Terry operates a convenience store while she offers
bookkeeping services to her clients.
In 2018, her gross sales amounted to ₱800,000.00, in
addition to her receipts from bookkeeping services of
₱300,000.00. She already signified her intention to be
taxed at 8% income tax rate in her 1st quarter return. Her
income tax liability for the year will be computed as
follows:
BUSINESS TAX = [(TOTAL SALES/RECEIPTS +
NON-OPERATIONAL INCOME) X 1%] OR TOTAL
SALES/RECEIPTS X 1%
Sample Computation: Illustration 3
Christy operates an online retail store and works as a
freelancer providing digital marketing services. This year
she earned ₱1,200,000 from her retail activity and
₱700,000 from her freelancing work. Her cost of sales for
the retail activity is ₱650,000 on top of other operating
expenses amounting to ₱230,000.
Compute the income tax due:
a. 8% tax rate b. Graduated rate

Sample Computation: Illustration 2

Ms. Terry above, failed to signify her intention to be taxed
at 8% income tax rate on gross sales in her initial
Quarterly Income Tax Return, and she incurred cost of
sales and operating expenses amounting to ₱600,000.00
Taxation Part 4
and ₱200,000.00, respectively, or a total of ₱800,000.00.

The income tax shall be computed as follows:
➢ Mixed Income Earner” is a compensation-earner who
at the same time is engaged in business or practice of
profession.
➢ A taxpayer deriving mixed income will also use BIR
Form 1701.
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
For mixed income earners, the income tax rates P120,000.00 but net of mandatory contributions to SSS
applicable are: and Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His
1. The compensation income shall be subject to the tax cost of sales and operating expenses are P1,000,000.00
rates prescribed under Section 24(A)(2)(a) of the Tax and P600,000.00, respectively, and with non-operating
Code, as amended; AND income of P100,000.00.
2. The income from business or practice of profession
shall be subject to the following: Option 1: Eight Percent (8%) income tax rate on Gross
a. lf the gross sales/receipts and other non-operating Sales
income do not exceed the VAT threshold; the individual His tax due for 2018 shall be computed as follows if he
has the option to be taxed at: opted to be taxed at eight percent (8%) income tax rate on
a.1 Graduated income tax rates prescribed under Section his gross sales for his income from business:
24(A)(2)(a) of the Tax Code, as amended; OR
a.2 Eight percent (8%) income tax rate based on gross
sales/receipts and other non-operating income in lieu of
the graduated income tax rates and percentage tax under
Section 116 of the Tax Code, as amended.
b.If the gross sales/receipts and other non-operating
income exceeds the VAT threshold, the individual shall be
subject to the graduated income tax rates prescribed
under Section 24(A)(2)(a) of the Tax Code, as amended.

▪The provision under Section 24(A)(2)(b) of the Tax Code,

as amended, which allows an option of 8% income tax rate
on gross sales/receipts and other non-operating income in
excess of ₱250,000.00 is available only to purely
self-employed individuals and/or professionals.
➢ The ₱250,000.00 mentioned is not applicable to
mixed-income earners since it is already incorporated
in the first tier of the graduated income tax rates
applicable to compensation income.
➢ Under the said graduated rates, the excess of the ₱
250,000.00 over the actual taxable compensation
income is not deductible against the taxable income
from business/practice of profession under the 8%
income tax rate option.
The total tax due shall be the sum of:
(1) tax due from compensation, computed using the
graduated income tax rates; and
(2) tax due from self-employment/practice of profession,
resulting from the multiplication of the 8% income tax rate
with the total of the gross sales / receipts and other
non-operating income.
Mixed income earner who opted to be taxed under the
graduated income tax rates for income from
business/practice of profession, shall combine the
taxable income from both compensation and
business/practice of profession in computing for the
total taxable income and consequently, the income tax
due.
Option 1 CONCLUSIONS:
➢ The option of 8% income tax rate is applicable only to
taxpayer’s income from business, and the same is in lieu
of
the income tax under the graduated income tax rates and
the percentage tax under Section 116 of the Tax Code, as
amended.
➢ The amount of ₱250,000.00 allowed as a deduction
under the law for taxpayers earning solely from
self-employment/practice of profession, is not applicable
for mixed-income earner under the 8% income tax rate
option.
➢ The ₱250,000.00 mentioned above is already
incorporated
in the first tier of the graduated income tax rates applicable
to compensation income.
Option 2: NOT Opting for 8% income tax on Gross
Sales/Receipts and other non-operating income
His tax due for 2018 shall be computed as follows if he did
not opt for the eight percent (8%) income tax based on
gross sales/receipts and other nonoperating income:

Sample Computation: Illustration 1

Mr. Madz, a Financial comptroller of JAC Company,
earned annual compensation in 2018 of P1,500,000.00,
inclusive of 13th month and other benefits in the amount of
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
Option 2 CONCLUSIONS:
➢ The taxable income from both compensation and
business shall be combined for purposes of computing the
income tax due if the taxpayer chose to be subject under
the graduated income tax rates.
➢ In addition to the income tax, Mr. Madz is likewise liable
to pay percentage tax of ₱72,000.00, which is 3% of
₱2,400,000.00; or ₱24,000 (1% until 2023).
Sample Illustration 1 Continued:
On February 2019, taxpayer tendered his resignation to
concentrate on his business. His total compensation
income amounted to ₱150,000.00, inclusive of benefits of
₱20,000.00. His business operations for the taxable year
2019 remains the same. He opted for the eight percent
(8%) income tax rate.
Sample Computation: Illustration 2
Mr. Wayne, an officer of BATS International Corp., earned
in 2018 an annual compensation of ₱1,200,000.00,
inclusive of the 13th month and other benefits in the
amount of ₱120,000.00. Aside from employment income,
he owns a farm, with gross sales of ₱3,500,000. His cost
of sales and operating expenses are ₱1,000,000.00 and
₱600,000.00, respectively, and with non-operating income
of ₱100.000.00.
His tax due for 2018 shall be computed as follows:
CONCLUSION:
The taxpayer has no option to avail of the 8% income tax
rate on his income from business since his gross sales
exceed the VAT threshold. However, he is still not subject
to business tax since the nature of his business
transactions is VAT exempt.
What are the VAT exempt transactions?
To give us a general conceptual guidance the following
are the Vat Exempted Transactions Quoting under SEC.
109. Exempt Transactions of Bureau of Internal Revenue.
You can check their website at https://www.bir.gov.ph.
1) The Sale or importation of agricultural and marine food
products, livestock and poultry for general use and human
consumption and breeding stock and genetic materials.
2) Fertilizers, seeds, seedlings and fingerlings; fish, prawn,
livestock and poultry feeds, including ingredients, whether
locally produced or imported.
3) The Importation of effects belonging from those coming
to resettle in Philippines.
4) Importation of professional instruments and implements,
tools of trade, occupation or employment, wearing apparel,
domestic animals, and personal and household.
5) Services subject to percentage tax.
6) Agricultural Contracts Growers and Milling
7) Medical, dental, hospital and veterinary services except
those rendered by professionals.
8) Educational services by Educational Institutions
accredited by Department of Educational (DepED), the
Commission on Higher Education (CHED) and the
Technical Education and Skills Development Authority
(TESDA) and those rendered by the government
educational institutions;
9) Services rendered by individuals pursuant to an
employer-employee relationship;
10) Services rendered by regional or area headquarters
established in the Philippines by multinational corporations
which act as supervisory, communications and
coordinating centers for their affiliates.
11)International Agreement – Philippines is a signatory
under special laws except under P.D. No. 529 – Petroleum
Exploration Concessionaires under the Petroleum Act of
1949;
JENEVA MAE GEOCADIN 12 ABM CERTITUDE
12)Agricultural cooperatives duly registered and in good For the List of latest VAT-Exempt Health Products
standing with the Cooperative Development Authority pursuant to Republic Act No. 11534, otherwise known as
(CDA). the “Corporate Recovery and Tax Incentives for
13)Lending activities by credit or multi-purpose Enterprises (CREATE) Act” here are the updated list that
cooperatives duly registered and in good standing with the are also accessible at the Food and Drug Administration
Cooperative Development Authority; (FDA) Verification Portal
14)Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with and in good standing ▪ Medicines for Hypertension
with CDA ▪ Medicines for Cancer
15)Export sales by persons who are not VAT-registered; ▪ Medicines for Mental Illnesses
16)Real Properties utilized for low coat housing RA No. ▪ Medicines for Tuberculosis
7279 known as Urban Development Act of 1992”;sale of ▪ Medicines for Kidney Diseases
real properties utilized for specialized housing as defined ▪ Medicines for Diabetes
under RA No. 7279, and other related laws, such as RA ▪ Medicines for High Cholesterol
No. 7835 and RA No. 8763, wherein price ceiling per unit ▪ Medicines and Medical Devices for COVID-19
is Php 450,000.00 or as may from time to time be
determined by the HUDCC and the NEDA and other
related laws; Sale of residential lot valued at One Million
Five Hundred Thousand Pesos (P1,500,000.00) and
below, or house and lot and other residential dwellings
valued at Two Million Five Hundred Thousand Pesos
(P2,500,000.00) and below, as adjusted using latest
Consumer Price Index values Million Five Hundred
Thousand Pesos (P1,500,000.00).
17)Lease of residential units with a monthly rental per unit
not exceeding Fifteen Thousand Pesos (P15, 000.00).
18)Books, Newspaper, Magazine, review or bulletin not
devoted principally to the publication of paid
advertisements
19)Transport of passengers by international carriers;
20)Passenger or cargo vessels and aircraft
21)Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport
operations.
22)Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank
financial intermediaries.
23)Sale or lease of goods and services to senior citizens
and persons with disabilities.
24)Transfer of property in merger or consolidation
(pursuant to Section 40(C)(2) of the Tax Code.
25)Association dues, membership fees, and other
assessments and charges collected on a purely
reimbursement basis by homeowners’ associations and
condominium.
26)Sale of gold to the Banko Sentral ng Pilipinasn (BSP).
27)Medicines prescribed for diabetes, high cholesterol,
and hypertension.

28)Sale or lease of goods or properties or the performance

of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or
receipts do not exceed the amount of Three Million Pesos
(Php 3,000,000.00). Note: Self-employed individuals and
professionals availing of the 8% on gross sales and/or
receipts and other non-operating income, under Sections
24 (A)(2)(b) and 24 (A)(2)(c)(2) of the NIRC shall also be
exempt from the payment of twelve (12%) VAT.