Report in Taxation

By: Maria Pamela Ortilla

BSA 5

NET WORTH
METHOD

A method of reconstructing income which is based on the theory that

if the taxpayers net worth has increased in a given year in an
amount larger than his reported income, he has understated his
income for that year.

The net worth on a fixed starting date is compared with the net worth
on a fixed ending date.

Any increase in net worth is presumed to be income not declared for

tax purposes.

NET WORTH
METHOD
Commonly used when taxpayer is suspected to have
avoided tax and accumulated asset.
When the taxpayer has no accounting records, the networth method is commonly used in determining taxable
income.

NET WORTH
METHOD

Net worth = Asset - Liablities

Formula to determine the taxable net income using net worth method:
Net worth, ending

P xxx

Less: Net worth, beginning

(xxx)

Increase(decrease) in net worth

P xxx

Add: Nondeductible items

xxx

Total

xxx

Less: Nontaxable items

xxx

Personal Exemptions (for individuals)

NET TAXABLE INCOME

xxx

(xxx)
xxx

CASH EXPENDITURE
METHOD
An important feature of any examination is the inspection or analysis
of the taxpayers bank records.
When the bank accountanalysisindicates a reasonable likelihood of
unreported income, the examination of income may be expanded to
include the use of the formal Bank Depositsand Cash Expenditures
Method to determine the actual understatement of taxable income.
This method is based on the premise that money received must either
be deposited or spent.

CASH EXPENDITURE
METHOD
Total deposits

P xxx

Add: Cash expenditure

xxx

Add: Increase in cash on hand

Less: Non taxable receipts
Gross receipts as corrected

xxx
(xxx)
xxx

Less: Gross receipts as per declaration

UNDERSTATED INCOME

(xxx)
xxx

Mr. Daniel Padilla, a sole proprietor, reports the following during taxable year
2015
Total Asset
Total Liabilities

2016

P300,000 P800,000
250,000

Additional Investments
Personal Withdrawals

200,000

100,000
100,000

Gain on proceeds of life insurance received

Unrealized loss debt securities deducted

230,000
150,000
20,000