TAX Accounting Methods & Accounting Periods

 

  1. Accounting periods of income taxpayers:
    1.  Calendar year – starts January 1 and ends December 31.
    2.  Fiscal year – accounting period of 12 months ending the last day of any month other than December 31st.
  2. Instances whereby taxable income must be computed on the basis of calendar year.
    • If the taxpayer is an individual.
    • If the taxpayer does not keep books.
    • If the taxpayer has no annual accounting period.
    • If the taxpayer’s annual accounting period is other than fiscal year.
  3. Instances whereby short accounting period arises:

When the taxpayer dies.

  • When a corporation is newly organized.
  • When a corporation is dissolved.
  • When a corporation changes accounting period.

Methods of accounting:

  1. Cash method – income is reported in the year it is received actually or constructively. Expense is deducted in the year it is paid.
  2. Accrual method – income is reported in the year in which it is earned. Expense is deducted in the year in which it is incurred.
  3. Hybrid method – combination or fusion of both the cash basis and the accrual method.
  4. Percentage of completion method – applicable only in long term construction contracts covering a period in excess of one year.
  5. Installment method – applicable in the following 3 cases only: 1. Sale of personal property by a dealer.
  6. Casual sale of personal property where the:
    • Selling price is over P1,000;
    • Initial payments do not exceed 25% of S.P.; and
    • Property is not of a kind which would be included in the taxpayer’s inventory if on hand at the close of the taxable year.
    • Sale of real property where the initial payments do not exceed 25% of S.P.

7. Crop year basis – applicable only to farmers engaged in the production of crops which take more than a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are deductible in the year the gross income from sale of the crops are realized.

I would like to invite you to join my Facebook exclusive groups of aspiring CPA for my upcoming project “CPA DREAM ACADEMY ” or sign up for flashcards free http://eepurl.com/coJBmf

CPA Mentor,

JONATHAN RUIZ CPA, MIB

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About Jonathan Ruiz CPA

Newbie Mentor and one of the influential author in the Philippines setting. His also the founder of PAM Academy and Developer of PAM PSE TRACKER application.
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