CONCEPT OF INCOME
Income – is the amount of wealth accumulated plus savings and the value of the personal consumption.
It refers to all earnings derived from service rendered (labor), from capital (business or investment), or both including gain
derived from sale or exchange of personal or real property classified either ordinary or capital asset.
Net Worth Method
Net worth, ending P xx
Less: Net worth, beginning xx
Increase (Decrease) in net worth P xx
Add: Nondeductible items xx
Total P xx
Less: Nontaxable items P xx
Personal exemptions (for individuals) xx xx
Net taxable income P xx
Net worth = Total assets minus total liabilities
Return on Capital VS Return of Capital
Income vs Capital vs Revenue vs Receipts
CAPITAL REVENUE RECEIPTS
- denotes the original investment or fund - pertains to all funds accruing to the -are considered cash collected over a
used in order to generate earnings which treasury of the government derived from business period
is called income. tax, donation, grants and any other source
Nontaxable Income – items of income excluded by law or treaty from taxation.
Taxable income – means the pertinent items of gross income specified in the Tax Code less the deductions, if any, and/or personal
and additional exemptions authorized by such types of income by the Tax Code or other special laws.
Characteristics of Taxable Income
1. There must be gain or profit.
2. The gain must be realized or received.
Income Constructively Received
o Interest credited on savings bank deposit
o Matured interest coupons not yet collected by the taxpayer
o Dividends applied by the corporation against the indebtedness of a stockholder
o Share in the profit of a partner in a general professional partnership, although not yet distributed
o Intended payment deposited in court (consignation)
3. The law or treaty does not exclude the gain from taxation.
Sources of Income
Income Taxpayers
Sources of Income
Resident Citizens / Domestic Corporations Nonresident Citizens / Aliens / Foreign Corporations
Earned:
Within Taxable Taxable
Without Taxable Nontaxable
Partly within and without Taxable Partly taxable
What are the classifications of income?
1. Compensation income -the gain derived from labor, especially from employment such as salaries and
commissions. This is usually subject to normal tax.
2. Business Income - the value derived from an exercise of profession, business or utilization of capital.
Usually subject to normal tax
3. Passive income - an income which the taxpayer merely waits for the amount to come in. Usually subject
to final taxes.
4. Capital gains- -an income derived from sale of assets not used in trade or business. Generally subject
to capital gains taxes.
Valuation of Income
1. Cash received for income earned
2. Fair value of property received as payment for income earned
3. Fair value (at the date the income was earned) of the share of stocks received as payment of income earned
4. Fair value of the share received (in the absence of any stipulated price) as payment of income earned
5. Fair value of the promissory notes received as payment of income earned
Face value of the note, if interest bearing
Discounted value or Present Value of the note, if non-interest bearing
Methods of Reporting Income and Expenses
CASH METHOD vs ACCRUAL METHOD
Accounting Methods Applicable Business Reportable Income Reportable Expenses
CASH BASIS Servicing Business Cash received Cash paid
1. Single proprietorship, except with inventory (earned or (incurred or not
2. General professional partnership unearned) incurred)
3. Leasing / renting business
ACCRUAL BASIS Trading and Manufacturing Businesses Earned (received or Incurred (paid or not
not received) paid)
Exceptions 1. Income constructively received Report
2. Advance / prepaid rent Prorate
3. Prepaid interest (individual taxpayer)
When to report interest expense?
a. No amortization of principal Year when principal
debt is paid
b. With amortization of principal Proportionate to
principal amortization
SPECIAL METHODS
Installment Method
Reportable Income = Installment collection received x Gross Profit/Contract Price
Important Terms:
1. Selling Price (SP) = Cash received + FMV of property received (if any) + Mortgage assumed by buyer (MAB)
2. Contract Price (CP) = SP + Excess of MAB over Cost (EMABOC) – MAB
3. Initial Payments = Downpayment +Installments received in the year of sale + EMABOC
When to Use Installment Method
1. Installment Sale of Personal Property
a. Regularly sold on an installment basis by a dealer
b. Casual sale on an installment basis subject to the following conditions:
The selling price exceeds P1,000
Initial payments do not exceed 25% of the selling price
If initial payments, considered cash sales
The property sold is not an inventory
2. Installment Sale of Real Property
a. Sale of realty (inventory) where the Initial payments do not exceed 25% of the selling price. This sale is subject to
30% corporate taxpayers, 5% - 32% for individual taxpayers.
b. Sale of real property as capital asset, if Initial payments do not exceed 25% of the selling price. This sale is subject
to 6% capital gains tax, based on the Selling Price or Zonal Value, whichever is higher.
Deferred Payment Method
Long-Term Construction Contracts
Gross Income from Farming
Business engaged in farming could derive income from the following sources:
1. Farm products raised
Harvest or product raised at selling price P xxx
Less: Unsold at end of the year (at selling price) xxx
Gross Income from Farm products raised (harvested and sold) P xxx
2. Trading or farm products purchased
Products sold P xxx
Less: Cost of sale xxx
Gain from sale P xxx
3. Other farm income
Methods of Computing Gross Income Derived from Farming
Cash Method Accrual Method
Gross Income from Farm products raised (harvested and sold) xxx xxx
Harvested and unsold at end of the year xxx
Gains from farm products purchased and sold xxx xxx
Other farm income xxx xxx
Total Gross Income xxx xxx
Crop Method
Gross income of crop realized xxx
Less: Entire cost of producing the crop xxx
Income xxx
