Accounting Periods and Methods and Other Compliance Requirements

Under Title II Tax on Income, Chapter 8 discussed Accounting Periods and Methods of Accounting. The tax code
prescribes that the taxable income as basis of income tax be computed based on the taxpayer’s annual
accounting period in accordance with the method of accounting regularly employed in keeping the books of the
taxpayer.
There are two important points to note:

1. Accounting Period
2. Accounting Method

ACCOUNTING PERIOD

The annual accounting period or taxable year is any twelve-month period that may be

1. Calendar Year
Calendar year is the twelve- month period starting from January 1 to December 31.
Calendar year is used as the period for computing the taxable income if:

 The taxpayer uses the calendar year as its accounting method in the annual reporting
of financial results
 The taxpayer does not keep books of accounts
 The taxpayer has not indicated its annual accounting period (default)
 The taxpayer is an individual
 

2. Fiscal Year
Fiscal year, on the other hand, refers to an accounting period of twelve (12) months ending on the last
day of any month other than December. For example, June 1 to May 31
The Tax Code may allow an accounting period/ taxable year shorter than twelve-months (Short Accounting
Period) if

 The corporation is newly organized

 When the corporation is dissolved
 When the taxpayer dies
 When the corporation changes accounting period
If the taxpayer is a corporation, it can change its accounting period from fiscal to calendar year, or calendar to
fiscal year, or from one fiscal year to another, it must be approved by the Commissioner of Internal Revenue and
the taxpayer must compute the net income based on the new accounting period. Because of the change in
accounting period, taxpayer is required to file a final or adjustment return.
Section 47, Chapter VIII of Title II prescribes the following

Change in Accounting Period Filing of Final Adjustment Return

Fiscal Year to Calendar Year a separate final or adjustment return shall be made

Calendar Year to Fiscal Year
One fiscal to another fiscal year
for the period between the close of the last fiscal
year for which return was made and the following
December 31.
For example:
Original Fiscal Year End – May 31, 2020
Changed to Calendar Year End – December 31, 2020
Adjustment Return is for the period June 1, 2020 to
December 31, 2020 (7-month period)
Calendar Year End with Regular Income Tax Return –
January 1, 2021 to December 31, 2021 and every year
thereafter
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.
For example:
Original Calendar Year End – December 31, 2020
Changed to Fiscal Year End – March 31, 2021
Adjustment Return is for the period January 1, 2021
to March 31, 2021 (3-month period)
Fiscal Year End with Regular Income Tax Return –
April 1, 2021 to March 31, 2021 and every year
thereafter
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.
For example:
Original Fiscal Year End – March 31, 2020
 Changed to Fiscal Year End – June 30, 2020
 
Adjustment Return is for the period - April 1, 2020 to
June 30, 2020
 
Fiscal Year End with Regular Income Tax Return – July
1, 2020 to June 30, 2021 and every year thereafter
 

 
The taxable income computed is for the period for which the separate final or adjustment return is made. A final
adjustment returns covering the total taxable income for the preceding calendar or fiscal year is filed by the
corporation. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total
tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid,
the excess amount shown on its final adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and
no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

ACCOUNTING METHOD
The Tax Code prescribes that the taxable income, which means determination of items of gross income to be
included and deductions to be allowed, be computed with the method of accounting regularly employed in
keeping the books of the taxpayer. Any approved standard method of accounting, if it reflects the true income
of the taxpayer, may be adapted. In cases where (1) the company does not have an accounting method
employed or (2) the accounting method employed does not clearly reflect the income, the CIR will determine
the appropriate accounting method that would clearly reflect the income of the taxpayer.
An acceptable accounting method is

 There should be distinction between revenue and capital expenditure

 Expenses to restore property or prolong its useful life should be added to the property
account or charged against depreciation
 In all cases in which production, purchase or sale of merchandise is an income
producing factor, inventories at the beginning and at the end of the accounting period
should be considered.
Methods of Accounting

 Cash Method
Income is reported in the year it was collected, actually or constructively, and expenses are deducted when it is
paid. Exception to this rule is prepaid rent or rent paid in advance because it must be pro-rated. Also, interest
paid in advance is allowed as deduction in the year the indebtedness or the periodic amortization is paid.

 Accrual Method
Income is reported in the year it was earned, regardless of when it is collected, and expenses are deducted from
gross income in the year incurred. However, rent income received in advance must be reported in full in the year
received.

 Crop Basis
This applies to the agriculture – farming sector. Farmers engaged in producing crops that take more than a year
from the time of planting to time of harvesting or disposing may use crop basis in computing for the taxable
income. The entire cost of producing the crop must be taken as a deduction in the year in which the gross
income from the crop is realized to properly match revenues and expenses.

 Installment Method
To be discussed separately.
 

 Percentage of Completion Method

Under Sec 48 Accounting for Long-term Contracts of the Tax Code, income from long-term contracts shall be
reported for tax purposes based on percentage of completion. Long-term contracts refer to building, installation
or construction contracts covering a period more than one (1) year. The income tax 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.  
Other Compliance Requirements

Title IX of the National Internal Revenue Code discussed BIR compliance requirements, as amended. Chapter I
discusses the requirements of keeping the books of accounts and records,
 
Keeping of Books of Accounts
Sec 232 of the Tax Code under Title IX requires all taxpayers required by law to pay internal revenue taxes to keep
and use relevant and appropriate set of books of accounts duly authorized by the Secretary of Finance. wherein all
transactions and results of operations are shown and from which all taxes due the Government may readily and
accurately be ascertained and determined any time of the year. The taxpayer can keep subsidiary books as support
and as needed by the business. These subsidiary books shall form part of the accounting system and shall be
subject to the same rules and regulations as to keeping, translation, production, and inspection applicable to the
basic accounting record such as journal and ledger. Under the TRAIN Law, all taxpayers are required to have, at a
minimum, a journal, and a ledger.
RMC 029-19 prescribes that a taxpayer can maintain its books of accounts in any of the following manner:

1. Manual Books of Accounts

2. Loose Leaf Books of Accounts (with permit to use)
 3. Computerized Books of Accounts (with Permit to Use)
These books of accounts must be kept at all times in the principal place of business.
Also, taxpayers with gross annual sales, earnings, receipts or output exceed Three Million pesos (P3,000,000), shall
have their books of accounts audited and examined yearly by independent Certified Public Accountants and their
income tax returns accompanied with a duly accomplished Account Information Form(AIF) which shall contain,
among others, information lifted from certified balance sheets, profit and loss statements, schedules listing
income-producing properties and the corresponding income therefrom and other relevant statements.
The books must be kept in native language, English or Filipino. (still Spanish in the Tax Code). If the books or the
subsidiaries are kept in language other than the native language, the taxpayer must make a true and complete
translation of all the entries in such other books or records into a native language; English or Spanish, and the said
translation must be made by the bookkeeper, or such taxpayer, or in his absence, by his manager, and must be
certified under oath as to its correctness by the said bookkeeper or manager, and shall form an integral part of the
aforesaid books of accounts. The keeping of such books or records in any language other than a native language;
English or Spanish, is hereby prohibited.
All taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting
records, for a period of ten (10) years reckoned from the day following the deadline in filing a return, or if filed
after the deadline, from the date of the Cling of the return, for the taxable year when the last entry was made in
the books of accounts: Provided that, within the first five (5) years reckoned from the day following the deadline in
Cling a return, or if filed after the deadline, from the date of the Cling of the return, for the taxable year when the
last entry was made in the books of accounts, the taxpayer shall retain hardcopies of the books of accounts,
including subsidiary books and other accounting records. Thereafter, the taxpayer may retain only an electronic
copy of the hardcopy (paper) of the books of accounts, subsidiary books and other accounting records in an
electronic storage system which is compliant with the requirements set forth under Section 2-A of Revenue
Regulations No. 5-2014.