Lecture 3 - Accounting Period and Methods of Accounting

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
General Rule:
The taxable income shall be computed based on the taxpayer's annual accounting period in accordance with the
method of accounting regularly employed in keeping the books of such taxpayer.
The term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the
basis of which the net income is computed. The income of any taxpayer may be computed using either of the
following periods:
1. Calendar Year – It begins with January 1 and ends on December 31 of any given year. This period is the only
option that an individual taxpayer may have.
2. Fiscal Year – It is a twelve-month period beginning any date during the calendar year, other than January 1,
and ending on the last day of any month other than December. Individual taxpayer is not allowed to use this
period.
Exceptions:
The Commissioner may prescribe an accounting method if:

o No method of accounting has been employed; or
o The method employed does not clearly reflect the income
The calendar year shall be used in computing the income if:

o The taxpayer's annual accounting period is other than a fiscal year;
o The taxpayer has no annual accounting period;
o The taxpayer does not keep books; or
o The taxpayer is an individual.
In the case of the death of a taxpayer, the decedent taxpayer’s income shall be accrued and computed from the
beginning of the calendar year up to the time of his death, unless such income pertains and was already reported
in the prior period.
Example 1:
On June 1, 2018, Jean, a resident of Bayugan, decided to put up her retailing business. Registering on June 30, her
bookkeeper suggested that she should use fiscal year beginning July 1, 2018 and ending June 30, 2019 and years
thereafter. For income taxation purposes, is the opinion of the bookkeeper correct?
Answers: No. Jean, the proprietor of the business, should use the calendar year beginning January 1 and ending
December 31 for income taxation purposes. Unlike other higher forms of business organizations, the taxpayer in
a proprietorship business is the owner herself. As such, she may use the fiscal year for accounting purposes only,
but not when it comes to reporting her income in filing her income tax return. Moreover, Jean shall file her first
income tax return on April 15, 2019 covering the incomes accrued from July 1, 2018 up to December 31, 2018.
Example 2:
Assuming the same example above, but the business is a partnership between Jean and John, is the opinion of the
bookkeeper correct?
Answer: Yes. Since the taxpayer in this case is not Jean nor John, but the business partnership itself – a corporate
taxpayer, it may choose to have its income reported either calendar year or fiscal year.
Example 3:
Fe, a professional accountant practicing her profession, died on May 25, 2018. For the year 2018, her income shall
be computed beginning January 1, 2018 up to March 25, 2018. The short-period accounting of income is necessary
to properly subject her incomes to tax. On the other hand, her 2017 incomes must have been already subjected
to tax, the tax due thereon must have already paid on April 15, 2018.
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Sources: Dascil, R. (2018). NIRC of the Philippines, as Amended 5th Edition; De Leon, H. S. & H. M. De Leon Jr. (2017). Comprehensive Review of Taxation;
Valencia, E. G. & G. F. Roxas. (2017). Income Taxation, Principles and Laws with Accounting Applications; RA 8424 and RA 10963
CHANGE OF ACCOUNTING PERIOD

It is important to emphasize that individual taxpayers can only use calendar year, thus change of accounting period
in computing their taxable income is not possible. However, if a taxpayer, other than an individual, changes its
accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new
accounting period.
Final or Adjustment Returns for a Period of Less than Twelve (12) Months
After the approval of the CIR, a final or adjustment return should be filed with the BIR for a period less than 12
months if the taxpayers chose to change its accounting period. This return is similar to that normal regular returns,
but it only covers the sales or receipts and incomes from the last time a return was filed up to the date of the
change of the accounting period.
Returns for Short Period Resulting from Change of Accounting Period
If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net
income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period
between the close of the last fiscal year for which return was made and the following December 31. If the change
is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the
close of the last calendar year for which return was made and the date designated as the close of the fiscal year.
If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for
the period between the close of the former fiscal year and the date designated as the close of the new fiscal year
(Sec. 47[a]).
Example 4: Calendar Year to Fiscal Year

ABC Company is currently using a calendar period in computing its taxable income. On May 16, 2018, it decided
to change its taxable period from calendar year to fiscal year, beginning June 1, 2018 and ending twelve months
thereafter. How should this change be treated?
(Old calendar year)
(New fiscal year)
January 1, 2018 June 1, 2018 December 31, 2018 May 31, 2019
May 16, 2018 (Decision to change)
Adjustment Return Normal Return

(January 1 – May 31, 2018) (June 1, 2018 to May 31, 2019)
Answer: ABC Company has already accounted its income in year 2017 since it was previously using a calendar year
(January 2017 to December 2017). Thus, the only concern here is the income earned from January 1, 2018 up to
May 31, the last day when it should be using the calendar year because beginning June 1 it would start using the
fiscal year. Hence, ABC should file an adjustment return covering those incomes earned from January 1 to May 31.
This is what is meant by “the period between the close of the last calendar year for which return was made and the
date designated as the close of the fiscal year.”
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Example 5: Fiscal Year to Calendar Year

Effective February 3, 2018, BOORS Company decided to shift from fiscal year of accounting to calendar year.
Currently, its fiscal year begins on August 1 and ends on July 31. How should this change be treated?
(Old fiscal year)
(New calendar year)
August 1, 2017 December 31, 2017 July 31, 2018 December 31, 2018
February 3, 2018 (Decision to change)

(August 1 – December 31, 2017) (January 1 to December 31, 2018)
Answer: Since upon the decision to change the accounting period (February 3, 2018) the company’s taxable period
is not yet completed (August 1, 2017 up to July 31, 2018), an adjustment return must be filed covering the incomes
earned from August 1, 2017 up to December 31, 2017. The adjustment return must not include the incomes
earned from January 1, 2018 to February 3, 2018 because they will form part of this calendar year’s taxable
income. Hence, the phrase “the period between the close of the last fiscal year for which return was made and the
following December 31”.
Example 6: Fiscal Year to another Fiscal Year
On June 20, 2018, Kat-Kat Company decided to change its fiscal year to another fiscal year. Currently, its fiscal year
begins on May 1 and ends on April 30. It decided to begin a new fiscal year starting July 1, 2018 and 12 months
thereafter. How should this change be treated?
(Old fiscal year)
(New fiscal year)
May 1, 2018 July 1, 2018 April 30, 2019 June 30, 2019
June 20, 2018 (Decision to change)

(May 1 – June 30, 2018) (July 1, 2018 to June 30, 2019)
Answer: Kat-Kat’s old fiscal year begins on May 1 and ends on April 30, while the proposed new fiscal year begins
on July 1 and ends every June 30. Thus, it can be implied that incomes earned since May 1, 2017 to April 30, 2018
were already taxed. The issue is the accounting of income earned from May 1, 2018 up to the date prior to the
start of the new fiscal year, which is June 30, 2018. Thus, Kat-Kat needs to file an adjustment return for its income
beginning May 1, 2018 up to June 30, 2018. The incomes earned beginning July 1, 2018 up to June 30, 2019 shall
be accounted normally as one taxable year. This is what is meant by “the period between the close of the former
fiscal year and the date designated as the close of the new fiscal year.”
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Example 7:
On September 7, 2018, Forever Company decided to change its accounting period from its old fiscal year to a new
fiscal year. Its old fiscal year begins on April 1 and ends on March 31 every year. The new fiscal year will begin
August 1 and ends every July 31. What period shall be covered in the adjustment return?
(Old fiscal year)
(New fiscal year)
April 1, 2018 August 1, 2018 March 31, 2019 December 31, 2018
September 7, 2018 (Decision to change)

(April 1 – July 31, 2017) (January to December 2018)
Example 8: Death of the Taxpayer

Alexis, a practicing lawyer, died on August 29, 2018 due to heart attack. A separate final return must be filed
covering incomes beginning January 1, 2018 until August 29, 2018.
January 1, 2018 August 29, 2018 December 31, 2018
Date of Death
Separate Final Return The taxpayer during this period is the

(January 1 – August 29, 2018) estate itself if remain unsettled.
The executor, administrator or any of the heirs of Alexis should file a separate final return for the period beginning
January 1 up to August 29, 2018. After such period, if the estate of Alexis remains unsettled or distributed to heirs
and that it continues to earn income, the taxpayer of such income earned will be the estate. The executor,
administrator or any of the heirs must notify the BIR, and register the estate as a separate taxpayer.
Example 9: Cessation from Business

Walang Forever Company liquidated its assets and liabilities with the intention to cease from business operation.
On September 3, 2018, it completely stops operating. The company normally accounts its income using fiscal year
beginning March 1 and February 28/29.
March 1, 2018 September 3, 2018 February 28, 2019
Cessation of Business
Separate Final Return

(March 1 – September 3, 2018)
Without waiting for February 28, 2019 to come, Walang Forever should file its final return upon cessation of its
business operation on September 3, 2018. Any income earned after such closure shall be taxable on the individual
capacity of the owners since after such cessation, the taxpayer company no longer exists.
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Income Computed on Basis of Short Period
Where a separate final or adjustment return is made on account of a change in the accounting period, and in all
other cases where a separate final or adjustment return is required or permitted by rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional
part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment
return is made.
Example 9:
On June 20, 2018, Kat-Kat Company decided to change its fiscal year to another fiscal year. Currently, its fiscal year
begins on March 1 and ends on February 28/29. It decided to begin a new fiscal year starting August 1, 2018 and
ending July 31. A cumulative data revealed the following for the year 2018:
January 1 – June 20 As of July 31 As of Dec. 31

Sales P 2,500,000 P 2,750,000 P 3,100,000
Cost of Sales 1,000,000 1,700,000 2,150,000
Business Expenses Claimed 340,000 700,000 1,050,000
Per record, 20% of the sales, 1/4 of the cost of sales, and 1/2 of the expenses from January to June pertain to the
last two remaining months of the previous taxable fiscal year. Compute the income to be filed for the adjustment
return.
Solutions:
The adjustment return shall cover incomes earned from the closing date of the old fiscal year up to the closing
date of the new fiscal year. Thus, in this case Kat-Kat should file a return for incomes earned beginning March 1,
2018 and ending July 31, 2018. It must be emphasized that the income from January 1 to February 28 pertains to
the previous taxable year, thus no longer necessary to be included in computing the income for adjustment return.
Jan. 1 Feb. 28 June 20 July 31 December 31
Decision
Period A Adjustment Return Period B
Period A above shows the last two months belong to the old fiscal year March 1, 2017 – February 28, 2018. Incomes
earned during Period A shall be included in the computation of the taxable income for the old fiscal year. On the
other hand, Period B pertains to the new fiscal year beginning August 1, 2018 and ending July 31, 2019. Incomes
earned during Period B shall be included in computing the taxable income of the new fiscal year. The incomes
earned during the adjustment period covering March 1, 2018 until June 30, 2018 shall be computed and filed in
the adjustment return. Thus,
Cumulative Sales (January to July 31) P 2,750,000

Sales pertaining to previous taxable year (P 2,500,000 x 20%) ( 500,000)
Exclusive sales for the adjustment period P 2,250,000
Less: Cost of Sales

Cumulative COS (January to July 31) P 1,700,000
Cost pertaining to previous taxable year (P 1,000,000 x ¼) ( 250,000) ( 1,450,000)
Gross Income for Adjustment Period P 800,000
Less: Expenses Claimed

Cumulative Expenses Claimed (January to July 31) P 700,000
Expenses pertaining to previous taxable year (P 340,000 x 1/2) ( 170,000) ( 530,000)
Net Income for the Adjustment Return P 270,000
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AMENDED RETURNS
General Rule: Any return, statement or declaration filed in any office authorized to receive the same shall not be
withdrawn.
Exception: Within three (3) years from the date of filing, the taxpayer may modify, change, or amend such return
and, statement of declaration filed.
Exception to the Exception: No modification, change or amendment may be accepted if a notice for audit or
investigation of such return, statement or declaration has been actually and already served upon the taxpayer.
Example 10:
Daniel filed his income tax return on April 14, 2018 for his income earned in 2017. On July 20, 2018, he found out
that he made an erroneous computation of expense thereby leading to mistake in the computation of tax. Daniel
asked the BIR to withdraw his previously filed return and file a new return instead to present his corrected income
tax. Can he do so?
Answer: No. Returns filed cannot be withdrawn. However, within 3 years from the date of filing, Daniel may file an
amended return indicating the corrected income tax due and pay the corresponding tax due thereon. It must be
emphasized that Daniel can only do so only if there was no notice of investigation yet rendered upon him by the
BIR.
METHODS OF ACCOUNTING INCOME

For income taxation purposes, the following methods shall be used in computing income, depending on the nature
of the business:
Cash Basis of Accounting
Under this method, incomes are reported when cash is collected, and expenses are reported when paid. Accrued
income is not reported such as that which is already earned but the cash is yet to be collected. In contrast,
unearned incomes, or those for which cash has already been received but the service is yet to be rendered, are
reported in the year of collection. This method is applicable to service-oriented enterprises.
Example 11:
Love Nia is a CPA and a lawyer practicing her legal profession. During the year 2018, she revealed the following:
Collections from various clients P 1,500,000
Collectibles due next year 750,000
Projected collectibles for cases under negotiation 800,000
Expenses:
Paid and duly receipted 400,000
Receipted under the name of Love’s Staff,
Liquidated and reimbursed by Love 50,000
Unreceipted expenses 300,000
For income taxation purposes, Love’s income shall be computed as:

Collections from various clients P 1,500,000
Less: Expenses paid and duly receipted ( 400,000)
Net Income P 1,100,000
Since Love is a service-concern taxpayer being in the practice of her legal profession, she may only use the cash
basis. Thus, collectibles due next year is not reported as income, unless and until collected. Moreover, projected
receivables for services not yet rendered are also not reported as income. On the other hand, expenses paid by
and named for the staff of the taxpayer, even if liquidated, reimbursed or receipted, cannot be claimed as business
expenses. To be a valid business expense, the item must be ordinary and necessary for the business, and duly
substantiated.
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Accrual Basis of Accounting
Unlike the cash basis, under this method, incomes are reported when earned, and expenses are reported when
incurred. Taxpayers who use accrual basis report their incomes when there is a sale or when the right to ownership
over goods sold is transferred from the seller to the buyer, irrespective of the period or date of collection. This
method requires: (a) the fixing of the right to income or liability to pay (the right to collect or the obligation to pay);
and (2) the availability of the reasonable accurate determination of such income or liability (appropriate
measurement criteria).
Under accrual basis, the right to collect must be existing and binding between the seller and the buyer, and the
obligation to pay must be certain and not yet prescribed, no matter the timing of the collection or payment.
Example 12:
Nina has a small retailing business at Langihan Market. For the year 2018, accounting records revealed the
following:
Receipts from sales to various customers P 1,600,000

Collectibles from her Kumares and amigas 200,000
Collectibles from one client, goods are still in the warehouse 100,000
Various purchases received and paid this year 900,000
Purchases from one supplier, FOB destination 300,000
Discount availed from Suppliers 20,000
Expenses claimed, 15% unreceipted 450,000
Assuming the beginning and ending inventory balances of Nina during 2018 were P 150,000 and P 200,000,
respectively, how much is the income subject to tax?
Solutions:
Nina shall use the accrual basis of accounting her income for income taxation purposes. Hence,
Sales during 2018:
Receipts from sales to various customers P 1,600,000
Collectibles from her Kumares and amigas 200,000
Total Sales P 1,800,000
Less: Cost of Sales
Beginning Inventory P 150,000
Purchases received and paid this year P 900,000
Less: Discount availed from Suppliers ( 20,000) 880,000
Goods available for sale P 1,030,000
Less: Ending Inventory ( 200,000) 830,000
Gross Income P 970,000
Less: Expenses claimed P 450,000
Less: Non-deductible expense (P 450,000 x 15%) ( 67,500) ( 382,500)
Net Income Subject to Tax P 587,500
The collectibles from one client for which the goods are still in the warehouse cannot be considered as a sale since
there is no transfer of the right over the goods yet to be delivered. Moreover, purchases from one supplier with
the term FOB destination cannot be considered as already owned by Nina because the goods are still in transit,
and the appropriate owner of the goods is still the supplier.
Accounting for Leasehold Improvements
Leasehold improvements are any improvement made by the lessee on the leased property, in pursuant to the
agreement between the lessor and the lessee, for which will become the property of the lessor upon the expiration
or termination of the contract of lease. The value of such improvement will become an income of the lessor using
either of the following methods.
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1. Outright Method
Under this method, the income from the value of the improvement is recognized when the improvement is
completed on the basis of its fair market value.
Example 13:
Miguel, the owner of one-hectare land, entered into a lease agreement with Luigi for a period of 10 years
beginning January 1, 2018. The terms of the lease provide that: (1) the lessee shall pay the lessor an amount
of P 150,000 as two-year deposit, and P 50,000 annual lease fee; and (2) the lessee shall erect a building the
ownership of which shall transfer to the lessor upon the expiration of the term of the lease or upon
termination. The advance payment is a security deposit which shall be paid back to Luigi upon expiration, but
in case of default of payment, such amount shall be appropriated.
The construction of the building began on January 1, 2018, and was completed on August 1, 2018 with a total
cost of P 2,000,000. The cost of construction equates to the fair value of the improvement. Determine the
income Miguel using the outright method.
Solutions:
Annual Rent Fee P 50,000
Leasehold Improvement (Completed on August) 2,000,000
Total P 2,050,000
Under the outright method, Miguel shall report a total income of P 2,050,000. The leasehold improvement
shall be considered already an income of Miguel since ultimately, it will be transferred to him. In case the lease
has already begun yet the construction of the improvement has not yet completed, Miguel shall only report
an income of P 50,000. The security deposit is one with an acceleration clause, such that if the lessee defaulted
the payment, such deposit may be applied or appropriated for payment. Thus, the security deposit is not an
income to the lessor, for the meantime; it is only when the lessee defaulted future payments that such deposit
may be considered as income
2. Spread-Out Method
Under this method, the estimated book value of the improvement at the end of the lease period is amortized
or spread-out over the term of the lease, and the income computed is reported every year until the lease is
over.
Example 14:
Iris, is a half Filipina and half French born of a Filipina residing in Cebu for almost 20 years. She owned one-
hectare vacant lot which she decided to lease to Chalita, a local business woman. Among others, the following
were agreed on their contract of lease:
o That the lessee shall pay an annual rent of P 120,000;
o That the lessee shall advance the payment of three years covering 2017, 2018 and 2019;
o That the lessee shall shoulder the property tax for the first two years, which is estimated to be P 25,000
per year;
o That the lessee shall construct a two-storey warehouse, the use of which shall depend upon the
lessee’s discretion;
o That the lessee shall surrender the warehouse upon the termination of the lease for causes such as
expiration of the term of the contract which is estimated to be 15 years or upon eviction of lessee in
case of default of four consecutive months or in any other cases which may result to eviction of lessee
from the property; and
o That the lease shall commence starting June 1, 2017 and shall be terminated in accordance with the
preceding provision.
Chalita began constructing the warehouse and has disbursed in total an amount of P 4,200,000 inclusive of P
200,000 interest from borrowings. The construction which began on February 1, 2017 has finally completed
by the end of August 2017 and is readily available for commercial use. Chalita’s accounting policy estimates
the warehouse to be useful for 18 years ignoring the possible future repairs.
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Solutions:
a. Assumption 1 – Outright Method
2017
Advance annual rent for three years (P 120,000 x 3) P 360,000
Property tax paid by Chalita on behalf of Iris 25,000
Construction cost of the warehouse (inclusive of borrowing costs) 4,200,000
Total income subject to tax P 4,585,000
Annual rent payment is taxable in full amount in the year of collection despite the fact that the lease began
in June 1 because the lessor is service-oriented, hence cash basis is more appropriate than accrual basis.
Thus, there is no need to compute for the unearned proportion. Property taxes must have been paid by
the owner of the property leased. But in this case, the lessee paid the tax on behalf of the owner thereby
benefiting the owner, Miguel. Such benefit is taxable on the part of the lessor.
2018
Property tax paid by Chalita on behalf of Iris in 2018 P 25,000
In 2018, only the property tax paid by the lessee shall be considered as income of the lessor since there is
no rent payment during this year, given that the advance payment was already made in 2017. In 2019, no
income shall be reported by the lessor, since the lease contract provides only for the payment of the first
two-year’s real property tax. Moreover, there is no annual rent received during 2019 being already
collected in advance in 2017.
In the year 2020 and the years thereafter until the expiration of the lease term, the lessor shall report an
income of P 120,000.
b. Assumption 2 – Spread-Out Method

Under this assumption, it is necessary to understand the timeline involved in the lease contract:
February 1 August 31 December 31

(Construction) (Completion) (End of Calendar Year)
June 1
(Start of Lease)
(First year’s amortization)
Lapse of 3 mos.
Life of the Improvement: 18 years

Life of the Lease Contract: 15 years but 3 months has expired already
Upon the completion of the leasehold improvement, the lease contract has already expired its term by 3
months from June 1 to August 31. Therefore, the remaining years to the expiration of the contract is only
14.75 years (15 years minus 3 months or ¼ year), or 177 months. This means that after the lease period,
the lessor has still 3.25 years or 39 months to enjoy the use of the improvement before the end of the
useful life of such improvement. This is computed as follows:
Useful life of the Warehouse 18 years

Less: Remaining Lease Term:
Original Lease Term 15 years
Less: Months expired upon completion (0.25 years) 14.75 years
Remaining useful life upon expiration of the Lease 3.25 years
The book value upon the expiration of the lease shall be computed as follows:
Book Value = Construction costs (FMV) x Remaining useful life upon expiration of the Lease
Useful Life of the Improvement
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Book Value = P 4,200,000 x 3.25 years

18 years
Book Value = P 758,333.33
The book value represents the benefit (income) earned by the lessor when the improvement is transferred
to her upon the expiration of the contract. Once the book value is computed, such amount is spread over
the remaining life of the lease.
Annual Amortization = Book Value

Remaining Term of the lease upon Completion
Annual Amortization = P 758,333.33

14.75 years
Annual Amortization = P 51,412.43
Monthly Amortization = P 4,284.37
The book value is divided over the number of months or years remaining until the end of the lease term
from the date of completion and availability of the improvement.
2017
Advance annual rent for three years (P 120,000 x 3) P 360,000.00
Property tax paid by Chalita on behalf of Iris 25,000.00
Income from leasehold (P 4,284.37 x 4 months) 17,137.48
Total income subject to tax P 402,137.48
The monthly income from leasehold improvement computed using the spread-out method is multiplied
by 4 months from September to December.
2018
Property tax paid by Chalita on behalf of Iris 25,000.00
Income from leasehold (P 4,284.37 x 4 months) 17,137.48
Total income subject to tax P 42,137.48
Comparative:
Outright Method Spread-Out Method
Months Months
Year Income Depreciation Years Income Reported
Depreciated Amortized
2017 P 4,200,000.00 P 77,777.78 4 2017 17,137.48 4
2018 - 233,333.33 12 2018 51,412.43 12
2019 - 233,333.33 12 2019 51,412.43 12
2020 - 233,333.33 12 2020 51,412.43 12
2021 - 233,333.33 12 2021 51,412.43 12
2022 - 233,333.33 12 2022 51,412.43 12
2023 - 233,333.33 12 2023 51,412.43 12
2024 - 233,333.33 12 2024 51,412.43 12
2025 - 233,333.33 12 2025 51,412.43 12
2026 - 233,333.33 12 2026 51,412.43 12
2027 - 233,333.33 12 2027 51,412.43 12
2028 - 233,333.33 12 2028 51,412.43 12
2029 - 233,333.33 12 2029 51,412.43 12
2030 - 233,333.33 12 2030 51,412.43 12
2031 - 233,333.33 12 2031 51,412.43 12
2032 - 97,222.22 5 2032 21,421.85 5
Totals 4,200,000.00 3,441,666.67 177 Totals 758,333.33 177
Net Income: P 758,333.33 Net Income: P 758,333.33
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Accounting for Long-term Contracts
The term 'long-term contracts' means building, installation or construction contracts covering a period in excess
of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such
income upon the basis of percentage of completion.
The return should be accompanied by a return certificate of architects or engineers showing the percentage of
completion during the taxable year of the entire work performed under contract. There should be deducted from
such gross income all expenditures made during the taxable year on account of the contract, account being taken
of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the
work under the contract but not yet so applied.
If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly
reflected for any year or years, the Commissioner may permit or require an amended return.
Example 15: Percentage-of-Completion Method

Emerald Information Engineering Inc. closed a 30 million-peso deal with Diamond Technologies to develop a
software for Diamond’s business analytics. The design and development of the software would take three (3) years
to finish as projected by the lead engineer of Emerald, Zack. The prototype software, after completion, is still
projected to undergo testing and modification.
During the development, the accounting records of Emerald show the following:
2018 2019 2020

Actual Cost Incurred to Date 12,000,000.00 21,000,000.00 23,500,000.00
Estimated Cost to Complete 10,000,000.00 3,000,000.00 0
Percentage of Completion 60% 85% 100%
Emerald’s income shall be computed as follow:

2018 2019 2020
Contract Price P 30,000,000 P 30,000,000 P 30,000,000
Percentage of Completion 60% 85% 100% .
Income Earned to Date P 18,000,000 P 25,500,000 P 30,000,000
Less: Cost Incurred to Date ( 12,000,000) ( 21,000,000) ( 23,500,000)
Gross Income to Date P 6,000,000 P 4,500,000 P 6,500,000
Less: Income already reported - ( 6,000,000) ( 4,500,000)
Gross Income this Year P 6,000,000 (P 1,500,000) P 2,000,000
Take note that above figures are cumulative meaning amounts reported in the previous years are also included in
the current year. As observed above, in 2018, Emerald will have to report an income of P 6,000,000 on the basis
of the percentage of completion of the project. Ignore the estimated cost to complete because in income taxation,
only actual costs are considered, not estimated.
While in 2019, the records showed that Emerald must only report an income for a total of P 4,500,000 for years
2018 and 2019. However, Emerald had already reported an income of P 6,000,000 in 2018, higher by P 1,500,000.
Thus, for 2019’s income tax return, Emerald has to reduce the total income reported by reporting a negative P
1,500,000.
In 2020, the records showed again that Emerald must report an income of P 6,500,000, contrary to the second
year’s P 4,500,000. This means that the company has to increase the income reported from P 4,500,000 to P
6,500,000, thus an increase of P 2,000,000.
This can be summarized as follow:

Contract Price P 30,000,000
Less: Total Costs incurred ( 23,500,000)
Total Gross Income in 3 years P 6,500,000
Page 11 of 21
OR
Income Earned in 2018 P 6,000,000
Reduction of Income in 2019 ( 1,500,000)
Increase of Income in 2020 2,000,000
Total Gross Income in 3 years P 6,500,000
Example 16: Fixed and Variable Contract Price

BTH Construction Services was being awarded by PNG Company for the construction of its six-storey building in
Cebu. The agreement, among others, include the following:
o The contract price shall be fixed at P 40,000,000.
o Materials and labor are estimated to cost 80% of the fixed contract price.
o Should the projected costs of materials and labor exceed the threshold, BTH shall pay the necessary costs,
while the contracting company shall reimburse BTH for 130% of the additional costs of materials and labor in
excess of the threshold.
o Any reimbursement and adjustment to contract price shall be made upon the last and final payment.
o In case of earlier completion, BTH shall be rewarded for 5% of the fixed contract price. While in case of delay,
a penalty shall be imposed at 10% of the total costs incurred.
o In addition to the 10% penalty, a 1/10 of 1% interest of the fixed contract price shall be imposed for every
month of delay.
o The construction shall commence immediately (January 1, 2018), the completion of which is promised to be
not later than December 31, 2020.
The accounting records of BTH showed the following:
2018 2019 2020 February 28, 2021

Cost of Materials 15,000,000.00 20,000,000.00 27,500,000.00 28,800,000.00
Cost of Labor 7,000,000.00 13,700,000.00 20,000,000.00 21,200,000.00
Percentage of Completion 30% 70% 90% 100%
Determine the income to be reported in the income tax of BTH Construction Services.
Solutions:
BTH’s income shall be computed as follow:
2018 2019 2020 February 28, 2021
Contract Price P 40,000,000 P 40,000,000 P 40,000,000 P 40,000,000
Percentage of Completion 30% 70% 90% 100%
Income Earned to Date P 12,000,000 P 28,000,000 P 36,000,000 P 40,000,000
Add: Reimbursable Amount - - - 23,400,000
Total Income to Date P 12,000,000 P 28,000,000 P 36,000,000 P 63,400,000
Less:
Cost of Materials to Date ( 15,000,000) ( 20,000,000) ( 27,500,000) ( 28,800,000)
Cost of Labor to Date ( 7,000,000) ( 13,700,000) ( 20,000,000) ( 21,200,000)
Gross Income to Date (P 10,000,000) (P 5,700,000) (P 11,500,000) P 13,400,000
Less: Income (loss) already
reported - 10,000,000 5,700,000 11,500,000
Gross Income this Year (P 10,000,000) P 4,300,000 (P 5,800,000) P 24,900,000
Less: Penalties
Charges (P 50,000,000 x 10%) ( 5,000,000)
Interest (P 40,000,000 x 1/10 x 1% x 2 mos.) ( 80,000)
Net amount P 19,820,000
Page 12 of 21
Note:
Adjustments to Contract Price
Cumulative Cost of Materials as of February 2021 P 28,800,000.00
Cumulative Cost of Labor as of February 2021 21,200,000.00
Total Costs P 50,000,000.00
Less: Threshold (P 40,000,000 x 80%) ( 32,000,000.00)
Excess costs to be reimbursed by PNG P 18,000,000.00
Reimbursement rate 130%
Reimbursable amount P 23,400,000.00
For the year 2018, BTH shall report a loss of P 10,000,000. While in 2019, the loss should have been P 5,700,000
only in contrary to the 2018’s calculated loss, thus BTH should reduce the loss previously reported by recognizing
a gain of P 4,300,000. In 2020, the loss increased to P 11,500,000, as compared with 2019’s loss of P 5,700,000
only. Thus, BTH must increase the cumulative loss by reporting a negative P 5,800,000. Finally in 2021, BTH must
recognize a total gain of P 13,400,000, before deducting the penalties and interest. Hence, it must add a positive
P 24,900,000 to eliminate all previously reported losses.
This can be summarized as follow:
Adjusted Contract Price P 63,400,000

Less: Cost Incurred to Date
Cost of Materials ( 28,800,000)
Cost of Labor ( 21,200,000)
Gross Income subject to Tax P 13,400,000
OR
Income (Loss) reported in 2018 (P 10,000,000)
Income (Loss) reported in 2019 4,300,000
Income (Loss) reported in 2020 ( 5,800,000)
Income (Loss) reported in 2021 24,900,000
Gross Income subject to tax P 13,400,000
Installment Basis of Reporting
Installment reporting accounts for income at the time collection rather than at the time of sale, for which collection
of the payment from customers extends over several years subsequent to the sale. Under this method, the
customers are required to make regular payments with a likelihood that full collection cannot be made, or
customers may default one or few payments in the future.
a. Selling price is the sum of amount received in exchange of the property sold.
Cash received xxx

Fair market value of the property received xxx
Installation received or collected from the buyer xxx
Mortgage assumed by the buyer xxx
Total selling price xxx
b. Contract price is the amount the buyer agreed to the seller. More often than not, the selling price and contract
price are equal. But in some cases, the contract price may differ from the selling price computed as:
Selling Price xxx
Add: Excess of mortgage over cost of property sold xxx
Total xxx
Less: Mortgage assumed by the buyer (xxx)
Contract price xxx
c. Initial payments means the payments received in cash or property other than evidences of indebtedness of
the purchaser during the taxable period in which the sale or other disposition is made.
Page 13 of 21
Downpayment xxx
Installment received in the year of sale xxx
Total xxx
Add: Excess of mortgage over cost of property sold xxx
Initial payments xxx
d. Periodic installment payment after the year of sale are the remaining balance collectible on a periodic basis
from the buyer.
Contract price xxx
Less: Initial payments (xxx)
Balance xxx
Divided by remaining periods xxx
Periodic installment xxx
e. The income reportable is computed as:
Year of Sale:
Gross Profit
x Initial Payments = Reportable Income
Contract Price
Following years:
Gross Profit x Collections this year = Reportable Income
Contract Price
Example 17:
GM Motors is a regular dealer of vehicles and automobiles. As part of its pricing and marketing scheme, it
accepts old owned vehicles by the buyer for a trade-in value. During the year, it sold two units to two different
buyers with the following terms:
Buyer X Buyer Y
Cash P 2,500,000 P 3,200,000
Old Car traded-in:
Cost 1,500,000 2,000,000
Depreciated Value 700,000 500,000
Fair Value 500,000 600,000
Mortgage Assumed by the Buyer 400,000 1,200,000
Cost of the Property Sold 900,000 1,000,000
Downpayment received 100,000 150,000
Years to pay the remaining balance 3 3
Solutions:
The income of GM Motors shall be computed as follow:
Buyer X Buyer Y
Cash P 2,500,000 P 3,200,000
Trade-in Value 500,000 600,000
Mortgage Assumed by the Buyer 400,000 1,200,000
Total selling price P 3,400,000 P 5,000,000
Add: Excess of Mortgage over Cost - 200,000
Less: Mortgage Assumed ( 400,000) ( 1,200,000)
Contract Price P 3,000,000 P 4,000,000
Downpayment P 100,000 P 150,000

Trade-in Value 500,000 600,000
Excess of Mortgage over Cost - 200,000
Initial Payments P 600,000 P 950,000
Page 14 of 21

Less: Initial Payments ( 600,000) ( 950,000)
Balance P 2,400,000 P 3,050,000
Divided by remaining periods 3 years 3 years
Periodic installment P 800,000 P 1,016,667
Take note that the periodic installment multiplied by the number of years of amortization or installment, plus
the cash downpayment will equal to the cash amount required in the contract,
Periodic installment P 800,000 P 1,016,667

Multiplied by number of years 3 years 3 years
Balance to pay P 2,400,000 P 3,050,000
Add: Cash Downpayment 100,000 150,000
Cash Payment Required per Contract P 2,500,000 P 3,200,000
Incomes will be reported as:

Year of Sale: Reportable Income (Sale to X)
(P 3,400,000 – P 900,000) x P 600,000 = P 500,000
P 3,000,000
Years thereafter:
(P 3,400,000 – P 900,000) x P 800,000 = P 666,667
P 3,000,000
(P 3,400,000 – P 900,000) x P 800,000 = P 666,667
P 3,000,000 The 2,500,000 is the
(P 3,400,000 – P 900,000) x P 800,000 = P 666,667 gross profit spread over
P 3,000,000 P 2,500,000 the collection period.
Year of Sale: Reportable Income (Sale to Y)

(P 5,000,000 – P 1,000,000) x P 950,000 = P 950,000
P 4,000,000
Years thereafter:
(P 5,000,000 – P 1,000,000) x P 1,016,667= P 1,016,667
P 4,000,000
(P 5,000,000 – P 1,000,000) x P 1,016,667= P 1,016,667
P 4,000,000 The 4,000,000 is the
(P 5,000,000 – P 1,000,000) x P 1,016,667= P 1,016,667 gross profit spread over
P 4,000,000 P 4,000,000 the collection period.
The respective income shall each year as computed above shall be reported on the year they are realized.
Applicability of Installment Reporting Method
In Installment reporting of income may be allowed to the following persons and under certain conditions:
1. Sale of Personal Property (Movable Property)

a. The seller is a dealer
- Regardless of the price, dealers of personal properties who regularly sells on installment basis may
use installment method.
b. Non-dealers of personal property

- Persons who are not usually selling personal property but sold one on installment basis, may be
allowed to report his income, for income taxation purposes, under installment method if the following
conditions are met:
o The sale is a casual sale or disposition, meaning not in the regular conduct of business;
o The property sold is not an inventory;
o The selling price is more than P 1,000.00; and
Page 15 of 21
o Initial payments do not exceed 25% of the selling price.

2. Sales of Real Property (Immovable Property)
a. The seller is a dealer, and:
o The real property sold was included as part of the inventory; and
o Initial payments do not exceed 25% of the selling price.
b. Sale of real property classified as capital asset (non-dealer)

o The seller is a non-dealer of realty
o The real property sold is not an inventory nor used in business
o The initial payments do not exceed twenty-five percent (25%) of the selling price
Under case (b) above, the taxpayer seller may pay the capital gains tax due (6%) on installment basis.
Example 18:
Sherwin is a realtor and a developer of residential lands which he sells to his customers. During the year June
2018, he sold two properties with terms given below:
Residential House and Lot (Inventory) Sherwin’s Farm Land

Selling Price P 3,500,000 P 2,400,000
Terms of Payment:
Downpayment 500,000 200,000
Mortgage Assumed by the buyer None 300,000
Installment Payments:
December 31, 2018 200,000 100,000
December 31, 2019 700,000 600,000
December 31, 2020 700,000 600,000
December 31, 2021 700,000 600,000
December 31, 2020 700,000 None
Sherwin’s farm land was bought two decades ago with a cost of P 200,000. While, the cost of residential house
and lot is P 2,000,000. Compute the reportable income of Sherwin.
Solutions:
The residential house and lot sold was part of Sherwin’s inventory, thus the sale shall be subject to normal tax,
while the farm land sold was a capital asset being a real property not held for business use. The sale of farm
land is subject to capital gains tax of 6%.
Residential House and Lot Sherwin’s Farm Land

Downpayment P 500,000 P 200,000
Payment received in the year of sale 200,000 100,000
Excess of Mortgage over cost - 100,000
Initial Payments P 700,000 P 400,000
Divided by Selling Price 3,500,000 2,400,000
Rate 20% 16.67%
Selling Price P 3,500,000 P 2,400,000

Add: Excess of Mortgage over Cost - 100,000
Less: Mortgage Assumed by the buyer ( 300,000)
Despite the fact that Sherwin is not a dealer of farm land, installment reporting may still be allowed for the
sale of farm land since the initial payments does not exceed 25% of the selling price. Hence, capital gains tax
for the sale of farm land shall be computed as:
Selling Price, Fair Market Value or Assessed Value, whichever is higher x 6% CGT
Capital Gains Tax: P 2,400,000 x 6% = P 144,000
Page 16 of 21
The capital gains tax above shall be paid as follow:
2018 P 400,000 x P 144,000 = P 26,182

P 2,200,000
2019 P 600,000 x P 144,000 = P 39,273
P 2,200,000
2020 P 600,000 x P 144,000 = P 39,273
P 2,200,000
2021 P 600,000 x P 144,000 = P 39,271
P 2,200,000 P 144,000
Residential House and Lot:

Gross Profit = P 3,500,000 – P 2,000,000
= P 1,500,000
The gross profit computed shall be reported in the following schedule:
2018 P 700,000 x P 1,500,000 = 300,000

P 3,500,000
2019 P 700,000 x P 1,500,000 = 300,000
P 3,500,000
2020 P 700,000 x P 1,500,000 = 300,000
P 3,500,000
2021 P 700,000 x P 1,500,000 = 300,000
P 3,500,000
2021 P 700,000 x P 1,500,000 = 300,000
P 3,500,000 P 1,500,000
Change from Accrual to Installment Basis
If a taxpayer qualified to install the reporting of income as in the case of dealers of personal property who elects
to report his taxable income on the installment basis, then subsequently change the method of computing his
income in any subsequent year, the amounts actually received, on account of sales or other dispositions of
property made previously, shall not be excluded if such collection is received during or after the year of change.
Example 19:
Daniel normally sells motor vehicles on installment basis payable for a period of two or three years. In 2018, a
pricing and marketing strategy urged Daniel to shorten the period of collection from a maximum of three years to
one year. Thus, he decided to change the reporting of income from installment to accrual basis. During such year
of change, accounting records reveal the following:
2017 2018
Sales P 2,200,000 P 2,700,000
Cost of property sold 1,200,000 1,300,000
Terms of Payment:
Downpayment, year of sale 500,000 700,000
Installment, 1/2/2018 500,000
Installment, 1/2/2019 500,000 800,000
Installment, 1/2/2020 350,000 600,000
Installment, 1/2/2021 350,000 600,000
Total P 2,200,000 P 2,700,000
Compute the income reportable of Daniel for the years 2017 and 2018.
Page 17 of 21
Solutions:
2017 2018
Gross Profit P 1,000,000 P 1,400,000
Selling Price 2,200,000 2,700,000
Gross Profit Rate (GP/SP) 45.45% 51.19%
Income to be reported in:
2017 P 227,273
2018 P 1,627,273
2019 227,273
2020 159,091
2021 159,091
The downpayment for sales 2017 is multiplied by its gross profit sale. Subsequent collections from the sales made
in 2017 shall be subject to the same gross profit rate. However, gross profit from sales made in 2018 and years
thereafter shall be reported in the year of sale since accrual method is used.
Deferred Reporting
Deferred reporting of income is applicable if the initial payments as discussed above exceeds 25% of the selling
price, which installment method is not applicable. When deferred reporting is more appropriate, the following
rules will apply:
o The note evidencing the obligation shall be converted to its discounted value.
o Interest pertaining to the amortization of the loan or obligation shall be reported as income in the year of
collection.
Example 20:
Joey is a regular dealer of home appliances on installment basis. In 2018, he made the following sales:
Cash Downpayment P 40,000
Installment payment evidenced by a note
2019 36,667
2020 36,667
2021 36,667
The note is non-interest bearing, but the prevailing market interest for similar transactions 10%. The cost of the
property sold is P 45,000. Compute the reportable income of Joey.
Solutions:
In this case, the initial payment is equal to the downpayment of P 40,000. To determine whether the taxpayer
qualifies for installment reporting, the following computation is necessary:
Cash Downpayment P 40,000

Installment payment evidenced by a note
2019 36,667
2020 36,667
2021 36,667
Total Selling Price P 150,000
Limit 25% (P 40,000/ P 150,000) 26.67%
Joey is not qualified to report his income on installment basis. Therefore, deferred reporting is more appropriate.
Discounting the note requires a mathematical formula shown below:
Present Value = 1 – (1+r) -n

r
Present Value = 2.48685
Page 18 of 21
Discounted Value = Equal Serial Payment x Present Value Factor
Discounted Value = P 36,667 x 2.48685
Discounted Value = P 91,185.40
The income to be reported is:

2018 2019 2020 2021
Cash downpayment P 40,000
Discounted value of the note 91,185
Total revenue P 131,185
Less: Cost of Property Sold ( 45,000)
Gross Profit P 86,185
Interest earned - P 9,119 P 6,364 P 3,332
Total Income earned P 86,185 P 9,119 P 6,364 P 3,332
The total revenue is spread over four years as follow
2018 P 131,185
2019 9,119
2020 6,364
2021 3,332
Total P 150,000
Accounting for Farming Business
A farming business embraces the farm in ordinary accepted sense, and includes stock, dairy, poultry, fruit and
truck farms, also plantations, ranches and all lands used for farming operations. A farmer is an individual,
partnership or corporation that cultivates, operates or manages farms for gain or profit, either as owner or tenant.
Income from farming business may come from:
a. Selling of farm products raised (those which are grown, cultivated, and harvested by the farmer);
b. Trading farm products purchased (those which are bought, cultivated and harvested by the farmer); and
c. Trading of other farm products and by-products.
In computing the taxable income of a farming business, one may choose using cash basis, accrual basis or crop
basis.
1. Cash Basis
Like the cash basis method already discussed, under this method, income is recognized when there is an inflow
of money or money’s worth to the company. Expenses are recognized when paid or when there is an outflow
of cash. This method ignores the increases or decreases of inventory at the end of accounting period. For
biological assets which are not normally sold such as livestock used solely for breeding or dairy production,
income is determined as the selling price of the agricultural produce less losses or difference sustained
between the cost and the fair value of the biological asset used for breeding or dairy production.
2. Accrual Basis
Under this method, incomes are recognized when there is already a transfer of rights, or when the sale is
actually consummated, and that the seller has already rendered what is due to him to the buyer. This method
recognizes the increases and decreases of inventory.
Example 21:
Corazon is engaged in farming business. She has two farming business: (1) rice crops, and (2) livestock – pigs.
During the year 2018, she has the following data:
Purchases of seedling for agriculture P 10,000
Purchases of piglets to be raised 30,000
Sale of raised and harvested rice crops 60,000
Page 19 of 21
Sale of raised and harvested livestock 70,000

Beginning inventory of raised and harvested rice crops 5,000
During the same year, Corazon has three sows (breeding pigs) which gave birth to 20 healthy piglets. The
piglets were also raised, and during the year, all of them were sold for a total of P 80,000. The sows, however,
were not sold, and maintained for breeding purposes.
Fair Value of Sows at the end of the year P 45,000
Losses or depreciation of the sows since last year 10,000
Ending inventory for the unsold rice crops 17,000
Unsold pigs (purchased piglets) 20,000
Expenses paid for fertilizers and cultivation 30,000
Expenses paid for feeds for the livestock 50,000
Compute the net income of Corazon.
Solutions:
Assumption 1 – Cash Method
Sale of raised and harvested rice crops P 60,000
Sale of pigs born this year 80,000
Total Revenue P 210,000
Less:
Losses or depreciation of the sows since last year 10,000 (130,000)
Net Income under Cash Method P 80,000
Assumption 2 – Accrual Method

Sale of raised and harvested rice crops P 60,000
Sale of pigs born this year 80,000
Total Revenue P 210,000
Less:
Losses or depreciation of the sows since last year 10,000 (130,000)
Net Income under Cash Method P 80,000
Add: Increase of Inventory – Rice Crops (P 17,000 – P 5,000) 12,000
Unsold pigs (these were purchased during the year) 20,000
Net Income under Accrual Method P 112,000
The difference between the two method lies on the recognition of inventories. Increase in ending inventories
shall mean lower cost of sales, thus higher income; while, decrease of ending inventories means higher cost
of sales, thus, lower income. It must also be noted that the fair value of sows (livestock for breeding purposes)
are not recognized as gain for income tax purposes, since the gain is not yet realized.
3. Crop Basis
This method is 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 such those engaged in log production.
Expenses paid or incurred are deductible only in the year the gross income from sale of the crops are realized.
Page 20 of 21
Example 22:
ARTEMCO is engaged in log production and log processing. It normally grows trees, and after several years,
usually seven to eight years, it harvests the logs from the trees planted. After cutting the trees, it replenishes
the cut trees by planting new ones, while processing the logs into several wood products. Some logs are not
processed, and are sold directly to buyers, usually outside the province. While, some undergo manufacturing
to make more useful products. Wastes from production are normally salvaged at a lower price.
For the year 2018, ARTEMCO revealed the following data:

Sales of:
Logs directly to buyers P 1,500,000
Wood Products 3,000,000
Wastes and By-products 700,000
Expenses paid and incurred in:
2011 300,000
2012 700,000
2013 450,000
2014 200,000
2015 270,000
2016 220,000
2017 100,000
Cost of Processing Logs in 2018 500,000
The income of ARTEMCO is computed as follow:

Sales of:
Logs directly to buyers P 1,500,000
Wood Products 3,000,000
Wastes and By-products 700,000
Total Revenue P 5,200,000
Less: Expenses and Costs
2011 P 300,000
2012 700,000
2013 450,000
2014 200,000
2015 270,000
2016 220,000
2017 100,000
Cost of Processing Logs in 2018 500,000 (2,740,000)
Net Income P 2,460,000
Again, under this method, all expenses and costs are accumulated and deducted only during the year where the
crops are realized or sold.
Hybrid Accounting
A hybrid accounting is one which uses two or more accounting methods as discussed previously in computing
reportable income. This method is applicable for persons engaged in two or more line of business either as part
vertical integration or diversification. When this method is used, incomes are appropriately reported using a more
relevant accounting method. Most often, hybrid accounting method involves the cash and accrual methods of
accounting different incomes. This is true particularly when the taxpayer is both engaged in selling of goods and
services.
Page 21 of 21

Lecture 3 - Accounting Period and Methods of Accounting

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Lecture 3 - Accounting Period and Methods of Accounting

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ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

The Commissioner may prescribe an accounting method if:

The calendar year shall be used in computing the income if:

CHANGE OF ACCOUNTING PERIOD

Returns for Short Period Resulting from Change of Accounting Period

Example 4: Calendar Year to Fiscal Year

(Old calendar year)

(New fiscal year)

May 16, 2018 (Decision to change)

Adjustment Return Normal Return

Example 5: Fiscal Year to Calendar Year

(Old fiscal year)

(New calendar year)

February 3, 2018 (Decision to change)

Adjustment Return Normal Return

Example 6: Fiscal Year to another Fiscal Year

(Old fiscal year)

(New fiscal year)

June 20, 2018 (Decision to change)

Adjustment Return Normal Return

(Old fiscal year)

(New fiscal year)

September 7, 2018 (Decision to change)

Adjustment Return Normal Return

Example 8: Death of the Taxpayer

January 1, 2018 August 29, 2018 December 31, 2018

Separate Final Return The taxpayer during this period is the

Example 9: Cessation from Business

March 1, 2018 September 3, 2018 February 28, 2019

Separate Final Return

Income Computed on Basis of Short Period

January 1 – June 20 As of July 31 As of Dec. 31

Jan. 1 Feb. 28 June 20 July 31 December 31

Period A Adjustment Return Period B

Cumulative Sales (January to July 31) P 2,750,000

Less: Cost of Sales

Less: Expenses Claimed

METHODS OF ACCOUNTING INCOME

Cash Basis of Accounting

For income taxation purposes, Love’s income shall be computed as:

Accrual Basis of Accounting

Receipts from sales to various customers P 1,600,000

Accounting for Leasehold Improvements

b. Assumption 2 – Spread-Out Method

February 1 August 31 December 31

Life of the Improvement: 18 years

Useful life of the Warehouse 18 years

Book Value = P 4,200,000 x 3.25 years

Annual Amortization = Book Value

Annual Amortization = P 758,333.33

Accounting for Long-term Contracts

Example 15: Percentage-of-Completion Method

2018 2019 2020

Emerald’s income shall be computed as follow:

This can be summarized as follow:

Example 16: Fixed and Variable Contract Price

The accounting records of BTH showed the following:

2018 2019 2020 February 28, 2021

This can be summarized as follow:

Adjusted Contract Price P 63,400,000

Installment Basis of Reporting

Cash received xxx