Income, in the broad sense, means all wealth which flows into the taxpayer other

than as a mere return of capital. It includes the forms of income specifically

described as gains and profits, including gains derived from the sale or other
disposition of capital assets. Income cannot be determined merely by reckoning
cash receipts, for the statute recognizes as income determining factor other items,
among which are inventories, accounts receivable, property exhaustion, and
accounts payable for expenses incurred. [Sec. 36, RR No. 0240 dated 10
February 1940]
CONSTRUCTIVE RECEIPT occurs when the money consideration or its equivalent is
placed at the control of the person who rendered the service without restrictions by
the payor. For example: i. Deposit in banks which are made available to the seller of
service without restrictions; ii. Issuance by the debtor of a notice to offset any debt
or obligation and acceptance thereof by the seller as payment for services
rendered; and iii. Transfer of amounts retained by the payor to the account of the
contractor. [Section 4.108-411 of RR No. 16-2005]
(3) Recognition of income
(4) Methods of accounting (a) Cash method v. Accrual method CASH METHOD
recognition of income and expense dependent on inflow or outflow of cash
(meaning, you recognize the income when you actually receive the cash payment
for the sale, and you recognize the expense when you actually pay cash for the
expense).
ACCRUAL METHOD method under which income, gains and profits are included
in gross income when earned whether received or not, and expenses are allowed as
deductions when incurred, although not yet paid. It is the right to receive and not
the actual receipt that determines the inclusion of the amount in gross income.
(b) Installment payment v. Deferred payment v. Percentage of completion
INSTALLMENT METHOD the taxpayer may report income over the several taxable
years in which collections are made based on the terms of payment.
Generally, the income derived on installment sale is the proportion of installment
collection actually received during the year in relation to the gross profit and
contract price.
DEFERRED PAYMENT METHOD where the initial payments on installment sale
exceed 25% of the selling price but they may only be realized in the subsequent
year, the taxpayer is allowed to defer reporting income for accounting purposes but
such sale is to be considered as the equivalent of "cash" which will be considered as
taxable in the month of sale. [Sec. 177, RR No. 2 as cited in BIR Ruling No. 263-92
dated September 16, 1992]
PERCENTAGE OF COMPLETION METHOD a method of recognizing the earnings
derived from long-term construction contracts. This method requires recognition of
income based on the progress of work.