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Bsa2 - Tax
Bsa2 - Tax
Bsa2 - Tax
ACCOUNTING PERIODS
AND ACCOUNTING
METHODS
Taxation Schemes under the NIRC
1. Final Income Taxation
2. Capital Gains Taxation
3. Regular Income taxation
The tax schemes are mutually exclusive. An item of gross income that is subject to
tax in one scheme will not be taxed to the other schemes. Similarly, items of
income that are exempted in one scheme are not taxable to other schemes.
FINAL INCOME TAX
Final Income Taxation is characterized by final taxes. Final taxes are withheld at
source. Consequently, the income received by the taxpayer under this system is
net of tax. The tax withheld at source is final and there would be no need to file an
income tax return to report the income to the government. Final taxation is
applicable only to certain passive income. Not all passive income is subject to final
tax.
Capital Gains Taxation
A capital gain tax is imposed on the capital gain on the sale, exchange and other
disposition of certain CAPITAL ASSETS.
Capital assets include all other assets other than ordinary assets. Ordinary assets
are assets directly used in the business, trade or profession of the taxpayer such
as inventory, supplies and items of property, plant and equipment.
The NIRC indentifies capital gains tax as a final tax but they are not actually final
tax similar to those imposed under final income taxation. The taxpayer still files a
capital gains tax return to report the gain to the government and pay the
corresponding tax.
Regular Income Taxation
The regular income taxation is the general rule in income taxation and covers all
other income such as:
1. Active income
2. Gains from dealings in properties
a. Dealings in ordinary assets
b. Dealings in other capital asset not subject to capital gains tax
3. Other income, active or passive, not subject to final tax
Accounting Period
Types of Accounting period
A fiscal accounting period is any 12-month period that ends on any day other than
December 31. The fiscal accounting period is available only to corporate income
taxpayers.
Deadline of Filing Income Tax Returns
Under the NIRC, the return is due for filing on the fifteenth day of the fourth month
following the close of the taxable year of the taxpayer. The regular tax due is
payable upon filing of the income tax return.
Short Period Return
Accounting period may be less than twelve months when:
Any approved standard method of accounting which reflects the taxpayer’s income
may be adopted.
Kinds of Methods of Accounting
The methods of accounting generally accepted and used in the Philippines are:
1. Cash method
2. Accrual method
3. Crop basis
4. Installment method
5. Percentage of completion
CASH METHOD
ACCRUAL METHOD
2. EXPENSE - Expense paid in advance, e.g. advance rent or prepaid rent, shall
be prorated, regardless of the method of accounting.
Income which is credited to the account of or set apart for a taxpayer and which
may be drawn upon by him at any time is subject to tax for the year during which
so credited or set apart, although not then actually reduced to possession.
INCOME - Income received in advance, e.g. advance rental or prepaid rent, shall
be reported in full in the year of receipt, regardless of the method of accounting.
Hybrid Basis
The hybrid basis is a combination of accrual basis, cash basis of other methods of
accounting. It is used when the taxpayer has several businesses which employ
different accounting methods.
Jennie uses accrual method of accounting. She owns a land she leased to Lisa for
2 years at an annual rental of P100,000. On July 1, 2020, she received P200,000
from Lisa representing the rental covering the period July 1, 2020 to June 30,
2022.
Initial payment means total payments by the buyer, in cash or property, in the
taxable year the sale was made. The term “initial payment” is broader than
downpayment. It also includes the installment payments in the year of sale.
Selling Price
Selling price means the entire amount for which the buyer is obligated to the
seller. It is computed as:
If the mortgage assumed was P162,000 and the selling price as P240,000, the
computation would be?
PERCENTAGE OF COMPLETION METHOD
Under the percentage of completion method, the estimated gross income from
construction is reported based on the percentage of completion of the construction
project.
There are several methods of estimating project completion in practice but the
output method based on engineering survey is prescribed by the NIRC.
Ms. A, contractor, expects to derive a gross income of P3,000,000 under a building
contract started in 2009 to be finished in 2011. Assume that the percentages of the
completion are as follows: 50% in 2009, 25% in 2010 and 25% in 2011.
1. Outright Method - the lessor may report as income at the time when such buildings or
improvements are completed the Fair Market Value of such buildings or improvements
subject to the lease.
2. Spread Out Method - the lessor may spread over the life of the lease the estimated
depreciated value of such buildings or improvements at the termination of the lease and
report as income for each year of the lease an aliquot part thereof.
Rose leased his lot to Fred for a term of 10 years at an annual rental of P120,000.
A building was erected by Fred on the lot with a cost of P1,000,000 and with
estimated life of 25 years. As per contract, the building will belong to Rose after
the term of the lease.
2. How much income should Rose report using spread out method?
Crop Year Basis
Farming income is commonly recognized using the cash basis or accrual basis.
However, long-term crops or those that takes more than one year to harvest may
be accounted for under the crop year basis.
Under the crop year basis, farming income is recognized as the difference
between the proceeds of harvest and expenses of the particular crop harvested.
The expenses of each crop is accumulated and deducted upon the harvest of the
crop.
Taxpayers with more than one type of businesses using different accounting
methods can consolidate the income reported using the different methods. There
is no need to restate the income to a common accounting method. However, the
methods applied to each business should be applied consistently from period to
period.
Rose provided the following data on sale of her personal property sold in 2016
held by him for 15 months:
● Cost P 225,000
● Mortgage assumed by the buyer 270,000
● Installment collection schedule:
○ 2016 67,500
○ 2017 67,500
○ 2018 45,000
QUESTIONS: