TAXATION

FAR EASTERN UNIVERSITY – MANILA

ACCOUNTING PERIODS AND METHODS (TAX 2001)
1. ACCOUNTING PERIODS
a. Calendar year Starts January 1 and ends December 31
b. Fiscal year Accounting periods of 12 months ending on the last day of any month other than December
c. Instances where net income must be computed on the basis of calendar year
1. If the taxpayer is an individual or a partnership
2. If the taxpayer does not keep books
3. If the taxpayer has no annual accounting period
4. If the taxpayer annual accounting period is other than fiscal year

d. Instances where short accounting period arises

1. When a corporation is newly organized and the accounting period is the calendar year
2. When a corporation is dissolved
3. When a corporation changes accounting period
4. When the taxpayer dies

e. (RR No. 3-2011) - Application for Change in Accounting Period

If a taxpayer, other than an individual, changes his 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.

Requirements of RR No. 3-11 may be summarized as follows:

1. While a choice of accounting period is a management discretion, change thereof must be approved by the Commissioner of
Internal Revenue through the Revenue District Office of registration;
2. The reason for change must be duly stated in the application;
3. Submission of the final adjustment return; and,
4. Duly approved amended By-laws for corporate taxpayers with the new accounting period.
f. Documentary requirements for the application to be filed at anytime not less than sixty (60) days prior to the
beginning of the proposed new accounting period:

Letter request addressed to the Revenue District Officer of registration indicating the (a) original accounting period and the
new accounting period to be adopted, and (b) the reason for desiring to change the accounting period.
1. Duly filled-up BIR Form No. 1905;
2. Certified True Copy of the Amended By-laws with the new accounting period duly approved by the Securities and
Exchange Commission (SEC);
3. Sworn certification of "non-forum shopping" stating that the request has not been filed or previously acted upon
by the BIR National Office, signed by the taxpayer or authorized representative; and,
4. Sworn undertaking by a responsible officer of the taxpayer to file a separate final or adjustment return for the period
between the close of the original accounting period and the date designated as the close of the new accounting period
on or before the 15th day of the fourth month following the end of the period covered by the final/adjustment
return.

Under Section 6 of RR 3-11, the Certification approving the adoption of a new accounting period must be released within thirty
(30) working days from the date of receipt of the complete documentary requirements.

2. ACCOUNTING METHODS
General accounting methods used for tax purposes:
• Cash method
• Accrual method
• Modified cash method

Note: For those entities using the accrual method of accounting, the same method shall be used for tax purposes.
Methods of Accounting
a. Cash Method 1. Income is reported in the year it is received actually or constructively
2. Expense is reported in the year it is paid
b. Accrual Method 1. Income is reported in the year earned
2. Expense is deducted in the year incurred

20. Accounting periods and methods Page 1 of 6

c. Crop Year Method
d. Methods for deferred payment sales
e. Method under long term contract
1. A farmer whose crop is harvested or gathered after more than one year
from time of planting may use crop year method
2. Deductions are recognized in the year the income from the crop is realized
1. Installment method
2. Deferred payment method
1. Percentage of completion method

f. Method for leasehold improvement 1. Annual or spread out method

2. Lump sum or outright method

Revenue Memorandum Circular (RMC) No. 22-2004

• All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the tax
Code, and the rules and regulations issued implementing said Tax Code.
• Taxability of income and deductibility of expenses shall be determined strictly in accordance with the provisions of
the Tax Code and the rules and regulations issued implementing the said Tax Code.
• In case of difference between the provisions of the Tax Code and the rules and regulations implementing the Tax
Code, on one hand, and the generally accepted accounting principles (GAAP) and the generally accepted auditing
standards (GAAS) , on the other hand, the provisions of the tax code and the rules and regulations issued impending
the said Tax Code shall prevail.

Changes in Accounting Method

Section 168 of RR No. 2
• The true income, computed under the law shall in all cases be entered in the return.
• If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a
separate statement setting forth for the taxable year and for the preceding year the classes of items differently treated
under the two systems, specifying in particular all amounts duplicated or entirely committed as the result of such
change.
• A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income
upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue.
• For the purposes of this action, a change in the method of accounting employed in keeping books means any change
in the accounting treatment of items of income or deductions.
• Application for permission to change the method of accounting employed and the basis upon which the return is
made shall be filed within 90 days after the beginning of the taxable year to be covered by the return.
• The application shall be accompanied by a statement specifying all amounts which would be duplicated or entirely
omitted as a result of the proposed change.
• Permission to change the method of accounting will not be granted unless the taxpayer and the Commissioner of
Internal Revenue agree to the terms and conditions under which the change will be effected.

Changes in Accounting Method

• For change in accounting methods requiring BIR approval, it appears that the change should be given prospective
application.
• There is no need to adjust the prior year’s income tax computation.
• This can be inferred from the BIR rulings issued which usually states that the change is effective on a given date
(which is the date of the approval)
• However, in BIR ruling DA-119-03 dated April 14,2003 the BIR allowed the retroactive application of the change in
depreciation method from straight-line to the declining balance method.

Accounting for Long-Term Contracts

• Long Term Contract – Building, installation or construction contracts covering a period in excess of one year.
• Income from long-term contracts shall be reported based on percentage of completion method. (Completed contract
method is no longer allowed subject to certain transitory provisions for contracts entered into and started prior to
January 1998)
Rules:
• Gross income shall be reported upon basis of percentage of completion.
• Certificate of architects and engineers showing the percentage of completion during the taxable year of the entire
work performed under the contract should accompany the tax return.

20. Accounting periods and methods Page 2 of 6

 •Deduct from gross income all the expenditures made during the taxable year on account of the contract but consider
materials and supplies on hand at beginning and end of the taxable period for use in connection with work under the
contract but not yet so applied.
(Section 48, Tax Code)
RAMO 1-2000
• In determining the percentage of completion of contract, generally one of the following methods is used:
1. The costs under the contract as of the end of the tax year are compared with the estimated total contract costs: or
2. The work performed on the contract as of the end of the tax year is compared with the estimated work to be
performed.
• In such a case, the return should be accompanied by a certificate of the architect or engineer 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 materials 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.

INSTALLMENT BASIS METHOD

• Applicable in the following cases:
i. Sales by a dealer of personal property on installments;
ii. Casual sale of personal property (other than inventory) on installments where selling price exceeds
P1,000 and the initial payments do not exceed 25% of the price.
iii. Sale of realty where the initial payments do not exceed 25% of the selling price; and
iv. Sale by individuals of real property, considered as capital asset, if initial payments do not exceed 25% of the
selling price.
Initial Payment - payments received in cash or property other than evidences of indebtedness of the purchaser during
the taxable period in which is the sale or disposition is made.
General formula for computing income:
1) Selling Price
Cash received by seller xxx
Add: FMV of property received xxx Capital Asset
Installment obligations of the buyer( Selling Price xxx
Evidence of indebtedness) xxx Less: Historical Cost (xxx)
Gain or (Loss) xxx/(xxx)
Mortgaged assumed by buyer xxx xxx
Selling Price xxx Ordinary Asset
Selling Price xxx
Less: Net Book Value (xxx)
2) Contract price Gain or (Loss) xxx/(xxx)
Selling price xxx
Less: Mortgaged assumed by buyer (xxx)
Add: Excess of mortgaged assumed over cost xxx
Contract price xxx

3) Initial payments – payments received in cash or property (other than evidence of indebtedness of the purchaser) during
the taxable year in which the sale was made
Downpayment xxx
Add: Installments, year of sale xxx
Excess of mortgage assumed over cost xxx xxx
Initial payments xxx

d. Computation of income Gross Profit__________x Installment received

to be reported under Contract Price
installment method

DEFERRED PAYMENT METHOD OF REPORTING INCOME

Gain on a sale or exchange of property under deferred payment plan may be reported under deferred payment
method if the initial payment exceed 25% of the selling price.

Under the deferred payment method of reporting income, the obligation of the buyer shall be given their equivalent in
cash.

PROBLEMS

20. Accounting periods and methods Page 3 of 6

Problem 1: (Ordinary Asset [Movable Property]- Installment Method) A company engaged in hauling truck in
installment on July 1, 20X3. The following data were presented in connection with the sale:
Cost of truck, January 20X1 P950,000
Accumulated depreciation, July 1, 20X3 350,000
Terms of sale:
Down payment, July 1, 20X3 225,000
Installment due, July 1, 20X4 225,000
Installment due, July 1, 20X5 450,000
Required: Compute the following
a. Selling price c. Initial payments
b. Contract price d. Income in 20X3

Problem 2: (Capital Asset [Movable Property] –Installment Method) Ms. A owns a car, which she bought for P700,000
on January 2, 20X2. She uses the car for personal purposes. On December 1, 20X4, she sells the car for P800,000 under
installment. The following terms are agreed upon by Ms. A and the buyer:
Down payment, December 1, 20X4 P100,000
Amount paid, December 15, 20X4 100,000
Installment due, December 1, 20X5 300,000
Installment due, December 1, 20X6 300,000
The accumulated depreciation of the car as of December 1, 20X4 is P408,333.
Required: How much is the income in 20X4?

Problem 3: (Ordinary Asset [Movable Property]– Deferred Method) Ms. G a real estate dealer, sold a real property for
P200,000 on October 29, 20X7 in installment. The cost of property was P150,000. The terms of the sale agreed upon by Ms.
G and the buyer were:
Down payment P40,000
Balance is payable in monthly installments of P10,000
Beginning November 29, 20X7 until fully paid 160,000
Required: How much was the income to be reported in 20X7?

PAYMENT OF CAPITAL GAINS TAX IN INSTALLMENT

Cases where capital gain tax may be paid in installment
a. Sale of real property (capital asset) when the initial payments do not exceed 25% of the selling price
b. Sale of shares of stock held as investment not through the local stock exchange hence the initial payments do not exceed
25% of the selling price
Computation of tax to be paid in Installments

a. Year of sale
Initial payments x Tax due
Contract price

b. Subsequent years
Initial received_ x Tax due
Contract price

1. CAPITAL GAINS TAX ON SALE OF REAL PROPERTY (CAPITAL ASSET)

a. Tax base and rate
1. Tax base: Selling price or FMV whichever is higher
2. Tax rate: 6%
b. Tax form
BIR Form 1706
c. Place of filing of capital gains tax return
1. Authorized Agent Bank (AAB) of the Revenue District Office having jurisdiction over the place where property being
transferred is located.
2. In place where there are no AABs, with Revenue Collection Officer or duly Authorized City or Municipal Treasurer of the
RDO having jurisdiction over the place where property being transferred is located.
3. On return shall be field for every real property sold, exchanged or disposed of (for cash sale, or foreclosure), or every
installment payment made (for installment sale).
d. Time of filing
20. Accounting periods and methods Page 4 of 6
1. Cash sale – within 30 days following each sale, exchange or disposition.
2. Installment sale – within 30 days after the receipt of the first down payment or following each subsequent installment.
e. Holding period
The holding period does not apply

DOCUMENTARY STAMP ON SALE OF REAL PROPERTY

a. Amount of documentary stamp tax

a) P15 – when the consideration or value received or contracted to be paid for realty after making the proper allowance for any
encumbrance does not exceed P1,000.

b) P15 – For each additional P1,000 or fractional part thereof in excess of P1,000 of such consideration or value.
b. Tax Forms

BIR Form 2000 (Documentary Stamp Tax Declaration Return);

BIR Form 2000-OT Documentary Stamp Tax Declaration Return (ONE- TIME TRANSACTIONS)
c. Filing and payment of documentary stamp tax

The tax return prescribed for documentary stamp tax shall be filed within 5 days after the close of the month when the
taxable document was made, signed, issued, accepted or transferred, and the tax thereon shall be paid at the same time the
return is filed.
d. Place of filing and payment of documentary stamp tax (same as in the sale of shares of stock of domestic
corporation not through the stock exchange)

a) The documentary stamp tax return shall be filed with and the tax due shall be paid through:
1) AABs within the territorial jurisdiction of the RDO which has jurisdiction over the residence or principal place of
business of the taxpayer.
2) In places where there is no AAB, the return shall be filed with the RDO, collection agent, or duly authorized Treasurer
of the city or municipality in which the taxpayer has his legal residence or principal place of business.
b) In lieu of the above, the tax may be paid either through purchases and actual affixture, or by imprinting the stamps through
purchases and actual affixture, or by imprinting the stamps through a documentary stamp metering machine, on the taxable
document, in the manner as may be prescribed by rules and regulations to be promulgated by the Secretary of Finance upon
recommendation of the Commissioner.
e. Effect of failure to pay or affix documentary stamp tax (same as in the sale of shares of stock of domestic
corporation not through the stock exchange)

a) An instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted, or
transferred without being duly stamped, shall not be recorded, nor shall it or any copy thereof or any record of transfer of the
same be admitted or used in evidence in any court until the requisite stamp or stamps shall have been affixed thereto and
cancelled.
b) No notary public or other officer authorized to administer oaths shall add his jurat or acknowledgement to any document
subject to documentary stamp tax unless the proper documentary stamps are affixed thereto and cancelled.

PROBLEM
Ms. Cruz sold her residential house under the following terms:
Cash received, January 10, 20x1 P100,000
Amount received, June 10, 20x1 100,000
Installment due, June 10, 20x2 600,000
Additional information:
Cost of land 150,000
Mortgage assumed by the buyer 200,000
Mortgage on the land executed by buyer in favor of the seller to guarantee payment 600,000
Required: Compute the following:
a. Selling price d. Capital gains tax in 20X1
b. Contract price e. Documentary stamp tax on the sale
c. Initial payments

2. CAPITAL GAINS TAX ON SALES OF SHARES OF STOCK OF DOMESTIC CORPORATION NOT THROUGH THE
STOCK EXCHANGE
a. Tax base and 1. Tax base: Net capital gain
rate 2. Tax rate: 5% on the first P100,000

20. Accounting periods and methods Page 5 of 6

 10% on excess of the first P100,000
b. Tax forms BIR Form 1707 Per transaction return
BIR Form 1707-AAnnual capital gain tax return
c. Place of filing 1. Authorized Agent Bank (AAB) under the jurisdiction of the RDO where the seller/transferor is required to
of capital gains register.
tax return 2. In places where there are no Authorized Agent Banks, the return shall be filed with the Revenue Collection Officer
or duly Authorized City of Municipal Treasurer of the RDO where the seller/transferor is required to register.
d. Time of 1. Per transaction return
filing a. Cash basis – within 30 days after each sale, barter, exchange, or other disposition of shares of stock not traded
through the local stock exchange.
b. Installment sale - within 30 days following the receipt of the first down payment or each subsequent installment
payment.

2. Final Consolidated Return - On or before April 15 of each year covering all stock transactions of the preceding
taxable year.
e. Holding The holding period does not apply
period

DOCUMENTARY STAMP TAX ON SALE OF SHARES OF STOCK OF DOMESTIC CORPORATION NOT THROUGH
THE STOCK EXCHANGE
a. Amount of documentary stamp tax

(P2) on each P200 or fractional part thereof, of the par value of such due bill, certificate of obligation or stock.

b. Tax Forms

BIR Form 2000 (Documentary Stamp Tax Declaration Return);

BIR Form 2000-OT Documentary Stamp Tax Declaration Return (ONE- TIME TRANSACTIONS)
c. Time of filing and payment of document stamp tax
The tax return prescribed for documentary stamp tax shall be filed within 5 days after the close of the month when the taxable document
was made, signed, issued, accepted or transferred, and the tax thereon shall be paid at the same time the return is filed.

PROBLEM
In 200A, Miss Virginia Reyes sold outside stock exchange 1, 000 shares of stock with a cost of P80 par value per share for P150 per share
under the following terms: P30,000 down payment and the balance shall be payable in three equal annual installments.
Required:
1. Compute the annual tax due of Miss Reyes for 200A, 200B, 200C and 200D
2. Compute the documentary stamp tax.

20. Accounting periods and methods Page 6 of 6