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Methods of Accounting in Philippine Taxation

Under the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS), the acceptable methods are the cash and accrual basis. Pursuant to Section 43 of the Tax Code, as amended, the taxable income shall be computed upon the basis of the taxpayer’s annual accounting periods (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income.

The methods of accounting recognized in the Philippine taxation are: 1. Cash Basis - is a method of accounting whereby all items of gross income received during the year shall be accounted for such a taxable year and that only expenses actually paid for shall be claimed as deductions during the year.

2. Accrual Basis - is a method of accounting for income in the period it is earned regardless of whether it has been received or not. In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid.

3. Percentage of Completion Basis - is a method applicable in the case of a building installation or construction contract covering a period in excess of one year whereby gross income derived from such contract may be reported upon the basis of percentage of completion.

4. Installment Basis - is a method considered appropriate when collections extend over relatively long periods of time and there is a strong possibility that full collection will not be made.

5. Crop Year Basis - is a method applicable only to farmers and taxpayers engaged in agriculture, livestock, fishery and similar undertaking for business where the production of crops, livestock and other biological assets takes more than one year from the time of planting or raising to the process of disposal.



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