Accounting Periods and

Methods of Accounting
(Sec. 43 to 50)
Sec. 43 – (Accounting Period) Calendar year or
fiscal year;
✔ Prerogative of taxpayer;
✔ Calendar when -
✔ accounting period is other than fiscal year; or
✔ No annual accounting period; or
✔ Does not keep books of accounts; or
✔ Individual
✔ RR # 03-2011 as amended by RR 09-2011.
Application:
1. An accounting period of twelve (12) months ending on the last day
of December?
a. Calendar year c. Leap Year
b. Fiscal year d. Sum of the year

2. An accounting period of twelve (12) months ending on the last day

of any month other than December?
a. Calendar year c. Leap Year
b. Fiscal year d. Sum of the year
Sec. 46 – Change of accounting period;
✔ Other than individual;
✔ Need the approval of BIR;
✔ Be made any time not less than 30 days prior to
the date of filing the return;
✔ Subject to Sec. 47 (short period of return)
✔ Subject to doc stamp tax.
✔ RR 3-2011 as amended by RR 9-2011
 Final or adjustment returns for a period of less than 12 months;

Sec. 47A – Returns of short period resulting from a change in

accounting period;
✔ Fiscal year to calendar year, short period return between
the close of the fiscal year for which return was made and
the following December 31.
✔ Calendar year to fiscal year, short period return between
the close of the last calendar year for which the return was
made and the date designated as the close of the fiscal
year.
 Final or adjustment returns for a period of less than 12 months;

✔ Fiscal year to fiscal year, short period return between the

close of the former fiscal year and the date designated as
the close of the new fiscal year.

Sec. 47B – Income computed on basis of short period;

✔ Fractional part of the year.
Application:

► Effective February 2019, Sulu Corporation changed its

calendar accounting period to a fiscal year ending
every June 30.

► Effective August 2019, Zamboanga Corporation

changed its fiscal year accounting period ending every
June 30 of the calendar year.
Other instances of short period return
• Newly commenced business
• Date of the start of the business until designated year end
of the business.
• Dissolution of the business
• Start of the current year up to date of dissolution.
• Death of the taxpayer
• Start of the calendar year until the death of the taxpayer.
• Accounting period terminated by BIR Commissioner
• Start of the current year until the termination of the
accounting period.
 3. Which one of the following cases may the taxable income be computed not on the basis of
calendar year?
I. Taxpayer has no accounting period
II. Taxpayer does not keep books of accounts
III. Taxpayer is an individual taxpayer
IV. Taxpayer is a corporation
V. Taxpayer is a general partnership
a. IV only
b. III, IV and V only
c. IV and V only
d. None of the above
4. Which of the following instances may give rise to short period of return?
b. When the corporation is newly organized using calendar year.
c. When corporation is dissolved.
d. When a corporation changes accounting period.
e. All of the above
Filing of the ITR –

• It should be filed on the fifteenth (15th) day of the

fourth month following the close of the taxable year
of the taxpayer.
• Calendar period (December 31) – on or before
April 15
• Fiscal period (ex. End period is June 30) – on or
before October 15
Sec. 44 – (Accounting Method) Period in which items
of gross income included;

✔ For the taxable year when received (Cash or

Accrual basis);
✔ Unless under other methods of accounting
permitted
✔ In case of the death, income up to the date of
his death;
Sec. 45 – (Accounting Method) Period for which
deductions and credits taken;

✔ For taxable year in which “paid or accrued” or

“paid or incurred”, depending on accounting
method used in computing net income;
✔ In case of death, deductions up to the date of
death;
5. A method of accounting where income is reported in the year it is collected,
actually or constructively received.
a. Cash basis c. Crop basis
b. Accrual basis d. Installment method

6. Which of the following statements is correct?

a. A change in the method of accounting requires a prior approval of the
Commissioner of Internal Revenue.
b. A change in accounting period does not require prior approval of the
Commissioner of Internal Revenue as long as the necessary income tax returns
for the different accounting periods are filed.
c. Both “a” and “b”
d. Neither “a” nor “b”
Advanced income and payments –

• Advanced income is taxable upon receipt. This is

applicable only to the rendering of services but not
on the sale of goods.

• Prepaid expenses is non – deductible unless used or

consumed. Applicable to sale of goods or rendering
of services.
 Application 1:

Nena, a sole proprietor has service business and reported the

following information:
Service income P 500,000
Collections during the year 490,000
Expenses incurred during the year 150,000
Expenses paid during the year 200,000

How much is the taxable income?

 Application 2:

In March 1, 2018, ABS Corporation reported the following business

income and expenses:
Sales P 1,000,000
Cost of Sales (600,000)
Operating Expenses 200,000
Gain from the sale of old furniture 20,000

If 20% of operating expenses of ABS is prepaid expenses, how much is

the taxable income?
Sec. 48 – Accounting for long – term contracts –

✔ Covering a period in excess of 1 year;

✔ Percentage of completion method;
✔ Certificate of Architects or Engineers;
✔ Expenditures be deducted from gross income are only
those made during the taxable year on account of the
contract. The same can be determined on the basis of
remaining inventory of materials and supplies.
 Application 3:
Engr. Guzman presented the following information Contract Price 50M
pertaining to his construction project which is 50% % of completion 50%
Income 25M
completed at the end of this year, and was completed Cost incurred
at the end of the next year. This year (10M)
Taxable income 15M
Contract price P 50,000,000
Total estimated cost to complete 30,000,000
Contract price 50M
Cost incurred this year 10,000,000 % of completion 100%
Cost incurred next year 9,000,000 Income 50M
Cost incurred
Next year 9M
Cost incurred
How much taxable income is to be reported this year? Last year 10M
Taxable income 31M
Taxable income 15M
Taxable INCOME 16m
Application 4:

The contract price of the project is P

1,000,000. Actual costs installed in 2018
Contract Price 1,000,000
amounted to P 90,000 and at that time the % of completion 20%
project is 20% completed. How much Income 200,000
Cost (90,000)
should be reported as taxable income
Taxable income 110,000
under the percentage of completion
method.
 Summary – Installment Sales
Sec. 49A to C
Personal Property – (subject to basic tax)
(A) Ordinary sale (ordinary asset - inventories)
✔
✔
RGP = collection x GPR
GPR = gross profit / contract price
memorize
✔ Regardless of the 25% limit
Ratio of IP/SP
(B) Casual sale (capital asset)
✔ SP exceeds P 1,000
✔ IP do not exceed 25% of the SP, otherwise deferred method.
✔ Observance of holding period (more than a year – 50%, if
not 100%)
 Summary – Installment Sales
Sec. 49A to C
(C) Real Property – either basic tax or capital gains
tax
✔
memorize
Ordinary asset – IP not exceeding 25% of SP, otherwise
deferred; subject to basic tax;
✔ Capital asset – IP not exceeding 25% of SP, otherwise
deferred; subject to Capital gains tax.
✔ RMC 35 - 2017
Formula:
1. Selling Price (SP) (amount realized)
Cash received P xxx
FMV of the property received xxx
Receivables xxx
Unpaid mortgage assumed by the buyer xxx
Selling Price (SP) P xxx

2. Contract Price (CP) (agreed to pay) memorize

Selling Price P xxx
Less: Mortgage assumed by the buyer xxx
Balance P xxx
Add: Excess unpaid mortgage over cost xxx
Contract price P xxx
3. Initial Payments (IP)
Down payment P xxx
Expected installment collection in the year of sale xxx
Excess of unpaid mortgage over cost xxx
Initial Payments P xxx

4. Installment capital gain tax = Total CGT x collection/ CP

5. Realized Gross Profit (RGP) (if subject to basic tax) memorize

RGP = Collections x GPR
GPR = Gross Profit/ Contract Price
Sec. 49D – Change from accrual to installment –
✔ … the income, for the year of change or any subsequent year, amounts
actually received during any such year on account of sales or other
dispositions of property made in any prior year shall not be excluded.

Sec. 50 – Allocation of income and deductions –

✔ distribution, apportionment, or allocation of gross income or deductions
to two or more organizations, trade or businesses (whether incorporated
or not, organized or not organized in the Philippines) owned directly or
indirectly by the same interest is allowed upon determination of BIR
Commissioner if it is necessary to prevent the evasion by the taxpayer.
✔ RR 2-1940; RAMO 1-1998; RMO 61-1998; RMC 26-2008, as amended by RR
02-2013.
In relation to sec. 50…
• Income under this section has an international aspect
termed international taxation. It has two fundamental
principles.
• Residence-based taxation
• Residents taxed on income earned within and
without the Philippines.
• Source-based taxation
• Non – residents is taxed on income within the
Philippines only.
In relation to sec. 49A…
Four (4) ways of dealers who sell on installment plan to
protect themselves in case of default are –
1. By agreement that title is to remain to the vendor until
complete performance of the vendee;
2. By agreement that title would be conveyed immediately
but subject to lien for unpaid portion;
3. By transfer of title to purchaser who at the same time
executes a reconveyance in the form of a chattel
mortgage to vendor; or
4. By reconveyance to a trustee pending performance of the
contract.
Rental Income
1. Obligations of the lessor assumed by the lessee are additional rental income of
the lessor.
2. Advance rentals are:
a. Item of gross income upon receipt if:
i. Unrestricted or
ii. Restricted to be applied in future years or upon the termination of the
lease.
b. NOT an Item of gross income upon receipt if:
i. It constitutes a loan
ii. It is a security deposit to guarantee payment or rent subject to contingency
which may or may not happen.
Leasehold improvement (RR #2)–

On the part of the lessor:

• Taxable is the cost of the leasehold improvements; provided life of the
improvements exceeds the lease term;
Methods:
• Outright method – income is the FMV of the improvement at the time of
completion.
• Spread – out method – income is based on the following:
✔ Total Income = Cost of improvement x (Excess useful life over lease term/
Useful life of the improvement)
✔ Annual income = Total income / lease term
Application:

Leasehold income is recognized over the lease term in

a. Outright method
b. Cash basis
c. Spread-out method
d. Percentage of completion method
 Application:
Oliver entered into a 40-year lease contract with
Berna. For agreement, Oliver will construct a
building on Berna’s lot and operate the same for 40
years. Ownership of the building will transfer to
Berna upon the termination of the lease. The lease
will not commence until the building is completed.
Oliver completed the building at a total cost of P
40,000,000 on January 1, 2020. The building is
expected to be used over 50 years. Compute
Berna’s income from the leasehold improvement to
be reported in 2020 using the spread-out method.
a. P 200,000
b. P 4,000,000
c. P 8,000,000
d. P 32,000,000
Application:

In the immediately preceding problem, assuming that the building was

completed on July 1, 2020, what is the income using the outright
method?
a. P 4,000,000
b. P 8,000,000
c. P 32,000,000
d. P 40,000,000
 Application:
Tomas lease an office space from Rafi, Inc. in a
non-renewable 10-year lease contract. Just after the
second year of the lease, Tomas renovated the
premises and made improvements at a cost of P
1,200,000. These improvements are expected to last
for 12 years. Compute Rafi’s annual income from the
leasehold improvement using the spread-out method.
a. P 50,000
b. P 37,500
c. P 30,000
d. P 20,000
 Leasehold improvement (RR #2)–
On the part of the lessee:
• the improvement is a deductible expense.
• Under outright method, the whole FMV is deductible while
under spread out, the ff: formula may be applied:
To discuss
✔
in Allowable Deduction
Total Deductible = Cost of improvement x (lease term/ Useful
life of the improvement)
✔ Annual deductible = Total deductible / lease term
Agricultural or Farming Income –
• Animal husbandry or short – term crops: cash or accrual;

• Long – term crops:

• Perennial crops – Initial farm development costs are capitalized and
amortized over the expected years of harvest. The harvest is accounted
under cash or accrual method.
• One time crops – crop year basis method. Formula:
Proceeds of the harvest P xxx
Expenses of the crop harvested (xxx)
Taxable income for the year P xxx
Application:

Which is correct regarding the crop year method?

a. Crop year method is an accounting period.
b. Crop year method recognizes farming income with the next
planting season commenced.
c. Crop year method matches cropping expenses with the income
upon harvest.
d. Crop year method recognizes cropping expenses with the
income upon harvest.
Application:
Hassan started raising swine for sale by purchasing 5 guilts and a boar
at a total purchase price of P 50,000 on January 2020. As of December
31, 2020, Hassan’ herd grew to 15 guilts, 2 boars and 20 piglets. The
total herd has a fair value of P 196,000 when sold as is. During the
year, Hassan earned P 180,000 from selling piglets. How much should
Hassan report as farming income in 2020?
a. P 326,000
b. P 180,000
c. P 146,000
d. P 130,000
Application:
Pedro, a farmer, uses the crop year method in reporting his income from
long-term crops. The following data are relevant to his farming operations in
2020?
∙ Sales of crop harvested, P 900,000
∙ Expenses on harvested crops, P 400,000
∙ Expenses on maturing crops, P 200,000
∙ Expenses on newly planted crops, P 100,000
∙ Sales of tree branches for firewood, P 50,000

Pedro uses the crop year method in reporting crop income. Compute
Pedro’s total income subject to tax.
b. P 240,000
c. P 340,000
d. P 540,000
e. P 550,000
Use of different methods –

1. Consolidation
• Taxpayers with more than one business may consolidate
the income applying the different methods.

2. Consistency
• But these methods shall be applied consistently to each
business.
References:

❑ NIRC of the Philippines by Dascil 2018 Edition

❑ Income Taxation by Banggawan, 2019 Edition
 End of Slide

CHRISTOPHER DE GUZMAN, C.P.A., C.A.T