ACCOUNTING PERIODS AND METHODS

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
a. If the taxpayer is an individual or a partnership
b. If the taxpayer does not keep books
c. If the taxpayer has no annual accounting period
d. If the taxpayer annual accounting period is other than fiscal year
d) Instances where short accounting period arises
a. When a corporation is newly organized and the accounting period is the calendar year
b. When a corporation is dissolved
c. When a corporation changes accounting period
d. 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.
f) Requirements of RR No. 3-11 may be summarized as follows:
a. 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;
b. The reason for change must be duly stated in the application;
c. Submission of the final adjustment return; and,
d. Duly approved amended By-laws for corporate taxpayers with the new accounting
period.
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.
a. Duly filled-up BIR Form No. 1905;
b. Certified True Copy of the Amended By-laws with the new accounting period duly
approved by the Securities and Exchange Commission (SEC);
c. 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,
d. 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
c. Crop Year Method
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
d. Methods for deferred payment sales
1. Installment method
2. Deferred payment method
e. Method under long term contract
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.
• 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)

RMO 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:

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.