CHAPTER 4 Accounting Methods

INCOME TAX SCHEMES, ACCOUNTING PERIODS, Accounting techniques used to measure income
ACCOUNTING METHODS, AND REPORTING
General Method
Accounting Period A. Accrual Basis- income is recognized when
Is the length of time over which income is earned regardless of when received.
measured and reported? Expenses is recognized when incurred
regardless of when paid
Regular Accounting Period (12 months in length)
A. Calendar B. Cash Basis income is recognized when
B. Fiscal received and expense is recognized when
Deadline: 15th day of the fourth month following paid
the close of the taxable year of the taxpayer

Calendar year must be used when: Financial accounting concept of accrual basis and
- Taxpayers annual accounting period is other cash basis are similar to their tax counterparts,
than a fiscal year except only for the following tax rules:
- Taxpayer has no annual accounting period 1. Advanced income is taxable upon receipt
- Taxpayer does not keep books 2. Prepaid expense is non-deductible
- Taxpayer is an individual 3. Special tax accounting requirement must
be followed
Short Accounting Period (less than 12 months)
1. Newly Commenced Business Installment Method
the accounting period covers the date of the gross income is recognized and reported
start of the business until the designated year end in proportion to the collection from the installment
of the business sales

2. Dissolution of Business Installment method is available to the following

accounting period covers the start of the taxpayers:
current year to the date of dissolution of the a. Dealers of personal property on the sale of
business properties they regularly sell
b. Dealers of Real Properties, only if their initial
3. Changes of Accounting Period by Corporate payment does not exceed 25% of the selling
Taxpayers price
accounting period covers the start of the c. Casual Sale of non-dealers in property, real
previous accounting period up to designated year- or personal, when their selling price exceeds
end of the new accounting period P1000 and their initial payment does not
exceed 25% of the selling price
4. Death of the Taxpayer
accounting period covers the start of the A. Initial Payment- total payments by the
calendar year until the death of the taxpayer buyer, in cash or property, in the taxable
year the sale was made
5. Termination of the accounting period of the B. Selling Price- entire amount for which the
taxpayer by the Commissioner of Internal buyer is obligated to the seller
Revenue C. Contract Price- amount receivable in cash or
accounting period covers the start of the other property from the buyer. It is usually
current year until the date of termination of the the selling price in the absence of an
accounting period agreement whereby the debtor assumes
indebtedness on the property
A sold his ring, a capital asset, on February 14, Construction:
2020. The ring was acquired at a cost of P60,000. Contract Price: 10,000,000
The terms of payment:
Down payment, February 14, 2020 P25,000 Percentage of Completion
Installment payment, February 14, 2021 25,000 2019- 30%
Installment payment, February 14, 2022 50,000 2020- 70%
Installment payment, February 14, 2023 20,000 2021- 100%
Total P120,000
The taxable gain to be reported by A in 2020 is Expenses
2019- 1,400,000
A sold his ring, a capital asset, on February 14, 2020- 2,200,000
2020. The ring was acquired at a cost of P60,000. 2021- 1,100,000
The terms of payment:
Down payment, February 14, 2020 P15,000
Installment payment, February 14, 2021 15,000
Installment payment, February 14, 2022 30,000
Mortgage assumed by the buyer 70,000
Total P130,000
The taxable gain to be reported by A in 2020 is

Deferred Payment Method

- a variant of the accrual basis and is used in
reporting income when a non-interest
bearing note is received as consideration in a
sale.
- Under the deferred payment method, the
gross income is computed based on present
value of a note receivable from the contract. Income From Leasehold Improvement
- The discount on the note is amortized as leasehold improvements are tangible
interest income over the installment term. improvements made by the lessee to the property
of the lessor. Improvements will benefit the lessor
Percentage Of Completion Method For
when their useful life extends beyond the lease
Construction Contracts
term. This benefit is referred to as income from
- The estimated gross income from
leasehold improvement.
construction is reported based on the
• Outright Method
percentage of completion of construction
• Spread-Out Method
project.
- There are several methods of estimating
Crop Year Basis
project completion in practice, but the output
under the crop year basis, farming income
method based on engineering survey is
is recognized as the difference between the
prescribed by NIRC
proceeds of harvest and expenses of the
particular crop harvested. The expenses of each
On December 1, 2019, a real estate dealer sold a
crop are accumulated and deducted upon the
residential land for 6M (cost is 3.6M) receiving
harvest of the crop
2M as down payment and a promissory note for
the 4M balance payable at P400,000 a month
beginning January 1, 2020. The promissory note
has fair market value equal to 75% of its face
value, if the income is to be reported under the
deferred payment method, the income in 2019 is
Mode of Filing Income Tax Returns Tax Schemes
• Manual Filing System Mutually Exclusive Coverage
• E-Bir Forms • Items of Gross Income
• Electronic Filing & Payment System (Efps) o Taxable To Any One Of
▪ Final Income Taxation
▪ Capital Gains Taxation
Penalties For Late Filing or Payment of Tax
▪ Capital Gains Taxation
• Surcharge
a. 25% of the basic tax for failure to file or pay Income Taxation Schemes
deficiency tax on time. • Final Income Taxation
b. 50% for willful neglect to file and pay taxes. - is characterized by final taxes wherein full taxes
• Interest are withheld by the income payor at source.
double of the legal interest rate for loans - The recipient income taxpayer receives the
income net of taxes.
or forbearance of any money in the absence of
- The payor is the one required by law to remit the
any express stipulation (12%) tax to the Government.
• Compromise penalty - Applicable only to certain passive income listed
compromise penalty is an amount paid in by the law.
lieu of criminal prosecution over a tax violation.
• Capital Gains Taxation
The income tax return for the calendar year 2018 - is imposed on the gain realized on the sale,
was due for filing on april 15, 2019, but the exchange and other dispositions of certain
taxpayer voluntarily filed his tax return without capital assets.
notice from the BIR, only on july 15, 2019. The
tax due per return amounts to P100,000. The total • Regular Income Taxation
amount due on july 15, 2019 (excluding - is the general rule in income taxation and
compromise penalty) is covers all other income.

if the income tax return is filed on time but

through an internal revenue officer other than with
whom the return is required to be filed. The total
amount due is

The taxpayer did not file his income tax return for
the calendar year 2018. He was notified by the
BIR of his failure to file the tax return, for which
reason he filed his tax return and paid the tax only
after said notice on October 15, 2020. The tax due
per return is P100,000. The amount due is

Taxpayer filed on time his income tax return for

calendar 2018 and paid P100,000 on April 15,
2019. Upon pre-audit of his return, it was
disclosed that he erroneously computed the tax
due. The correct amount of tax due is P 120,000.
The taxpayer is assessed for deficiency income
tax in a letter of demand and assessment notice
issued on June 15, 2020 calling for payment on or
before July 15, 2020. The amount still due on
July 15, 2020 is
 APPENDIX 1 - SUMMARY OF FINAL TAX RATES
SUMMARY OF FINAL TAX UNDER THE NIRC AS AMENDED
INDIVIDUAL CORPORATION
CITIZEN ALIEN
NON-RESIDENT FOREIGN
RC NRC RA ETB NETB DC RFC NRFC
INTEREST INCOME
Local Currency Deposit
Short term interest or yield 20% 20%
25% 25%
Long term interest or yield exempt RIT
Pre-termination interest rate
less than 3 years 20%
3 to less than 4 years 12% 25% 20% 25%
4 to less than 5 years 5%
Foreign Currency Deposit
Interest income from FDCUs/OBU depository bank 15% 15% 15%
exempt exempt exempt
Interest income of FDCU/EFCDU 10% 10% 10%
Interest income on foreign loans N/A 20%
Tax-free covenant bonds 30% N/A

DIVIDEND INCOME
Domestic Corporations, in general
January 1, 1998 earnings 6%
January 1, 1999 earnings 8% 20% 25% exempt 15%*
January 1, 2000 earnings and thereafter 10%
Real Estate Investment TRUST or REIT 10% exempt 10% <10%^^ <10%^ exempt <10%^
Foreign Corporations regular income tax (RIT) ruels applies

SHARE IN NET INCOME

of taxable partnership, joint venture & co-ownership 10% 20% 25% 10% 25%

ROYALTIES
Passive Royalties
In General 25%
20%
Cinematographic, films nad similar work 20%
25%
Books, literary works & musical compositions 10% 10% 10% 10%
25%
Active Royalteis regular tax RIT

TAXABLE PRIZES
P10,000 and below regular tax
25% RIT 25%
Above P10,000 20%

WINNINGS
In General RIT
20%
PCSO & lotto winnings > P10,000 25% 20% 25%
PCSO & lotto winnings </= P10,000 exempt exempt

INFORMER'S TAX REWARD 10% 25% 10% 25%

 APPENDIX 1 - SUMMARY OF FINAL TAX RATES
SUMMARY OF FINAL TAX UNDER THE NIRC AS AMENDED
INDIVIDUAL CORPORATION
CITIZEN ALIEN
NON-RESIDENT FOREIGN
RC NRC RA ETB NETB DC RFC NRFC
INTEREST INCOME
Local Currency Deposit
Short term interest or yield 20% 20% 20% 20% 25% 20% 20% 25%
Long term interest or yield exempt exempt exempt exempt 25% RIT RIT 25%
Pre-termination interest rate
less than 3 years 20% 20% 20% 20% 25% 20% 20% 25%
3 to less than 4 years 12% 12% 12% 12% 25% 20% 20% 25%
4 to less than 5 years 5% 5% 5% 5% 25% 20% 20% 25%
Foreign Currency Deposit
Interest income from FDCUs/OBU depository bank 15% exempt 15% exempt exempt 15% 15% exempt
Interest income of FDCU/EFCDU 10% exempt 10% exempt exempt 10% 10% exempt
Interest income on foreign loans N/A 20%
Tax-free covenant bonds 30% 30% 30% 30% 30% N/A N/A N/A

DIVIDEND INCOME
Domestic Corporations, in general
January 1, 1998 earnings 6% 6% 6% 20% 25% exempt exempt 15%*
January 1, 1999 earnings 8% 8% 8% 20% 25% exempt exempt 15%*
January 1, 2000 earnings and thereafter 10% 10% 10% 20% 25% exempt exempt 15%*
Real Estate Investment TRUST or REIT 10% exempt 10% <10%^^ <10%^ exempt exempt <10%^
Foreign Corporations regular income tax (RIT) ruels applies

SHARE IN NET INCOME

of taxable partnership, joint venture & co-ownership 10% 10% 10% 20% 25% 10% 10% 25%

ROYALTIES
Passive Royalties
In General 20% 20% 20% 20% 25% 20% 20% 25%
Cinematographic, films nad similar work 20% 20% 20% 20% 25% 20% 20%
Books, literary works & musical compositions 10% 10% 10% 10% 25% 20% 20% 25%
Active Royalteis regular tax 25% RIT 25%

TAXABLE PRIZES
P10,000 and below regular tax 25% RIT 25%
Above P10,000 20% 20% 20% 20% 25% RIT 25%

WINNINGS
In General 20% 20% 20% 20% 25% RIT 25%
PCSO & lotto winnings > P10,000 20% 20% 20% 20% 25% 20% 20% 25%
PCSO & lotto winnings </= P10,000 exempt 25% exempt 25%

INFORMER'S TAX REWARD 10% 10% 10% 10% 25% 10% 10% 25%