Accounting Methods and

Periods
Accounting Periods
• Calendar Year
• Starts January 1 and ends December 31
• Fiscal Year
• Accounting period of 12 months ending on the last day of any month other than December
• Instances where net income must be computed on the basis of the
calendar year
• If the taxpayer is individual or partnership
• If the taxpayer does not keep books
• If the taxpayer has no annual accounting period
• If the taxpayer’s annual accounting period is other than fiscal year
• Instances where short accounting period arises
• When a corporation is newly organized and the accounting period is calendar year
• When a corporation is dissolved
• When a corporation change accounting period
• When the taxpayer dies
Accounting methods
Cash and Accrual Method

• Cash Method
• Income is reported in the year end it is received or constructively
• Expense is reported in the year it is paid

• Accrual Method
• Income is reported in the year earned
• Expenses is deducted in the year incurred
Hybrid Method and Crop year method

• Hybrid Method
• The taxpayer report his income and expenses by employing the combination of
accrual and cash methods.

Crop Year Method

• A farmer whose crop is harvested or gathered after more than one year from
the time of planting may use the crop year method
• Deductions are recognized in the year the income from the crop is realized
Installment Method of reporting Net income

• When a seller allows a customer to pay for a sale over multiple years,
the transaction is frequently accounted for by the seller using the
installment method. Because of the long period of time involved, the
risk of loss from customer nonpayment is higher, so a prudent person
would defer the recognition of some portion of the sale - which is what
the installment method does.

(Gross profit/Contact Price) x Instalment payment actually received =

Income to be reported for the year
Deferred Payment Sales Method of Reporting
Income

• The deferred sales method of reporting income shall be used although

the payment of the selling price extend over 1 year where the payments
received by the seller in cash or property exceed 25% of selling price.
• The taxable gain or income returnable during the year of the sale is the
difference between the selling or contract price and the cost of the
property.
• If the initial payment received by the seller in the year of the sale do
not exceed 25%, the sale is on the installment plan.
Percentage of completion method: Long term
Contract

• The percentage of completion method is an accounting method in which

the revenues and expenses of long-term contracts are recognized yearly as a
percentage of the work completed during that year. The percentage of
completion method of accounting is commonly used in construction projects.
• Persons whose GI is derived in a whole or in part of such contract shall report
such income using the percentage of completion method.
• Illustration: Timothy, contractor , expects to derived a GI of 3,000,000 under
the building contract started 2009 to be finished 2011. Assume that the
percentages of the completion are as follows: 50% in 2009, 25% in 2010 and 25%
in 2011.
Methods of leasehold improvement

1. He 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; or

2. He 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.