Accounting V Tax Treatment

Fundamental differences between the accounting and tax treatment of certain items of
income and expense stem from the difference in purpose of financial statements, which
are the end product of the accounting process and that of taxation.
The purpose of financial statements is to aid in the decision making of the user. For
instance, a potential investor, in deciding which company to invest in will need to rely on
the financial statements (Statement of Comprehensive Income, Statement of Financial
Position, Statement of Cash Flow and Notes to Financial Statements) to make an
informed decision. On the other hand, the basic objective of imposing taxes is to raise
revenue for the government.
Accounting Recognition Tax Recognition

Pension/ Employee Benefits
Philippine Accounting Standards (PAS) 19 Sec. 34 J of the
NIRC
an expense is recognized when the entity consumes the economic benefit shall be allowed as a
arising from service provided by an employee in exchange for employee deduction when
benefits.
Accounting by an entity for defined benefit plans involves the following steps: a. Ordinary and
necessary to the
(a) determining the deficit or surplus. This involves: trade or business of
the taxpayer
using an actuarial technique, the projected unit credit method, to make a
reliable estimate of the ultimate cost to the entity of the benefit that employees
b. Reasonable
have earned in return for their service in the current and prior periods. This c. a reasonable
requires an entity to determine how much benefit is attributable to the current amount transferred or
and prior periods and to make estimates (actuarial assumptions) about paid into such trust
demographic variables (such as employee turnover and mortality) and during the taxable
financial variables (such as future increases in salaries and medical costs) that
will affect the cost of the benefit; year in excess of
discounting that benefit in order to determine the present value of the defined such contributions,
benefit obligation and the current service cost; but only if such
deducting the fair value of any plan assets from the present value of the amount
defined benefit obligation;
(b) determining the amount of and the net defined benefit liability (asset) as
(1) has not
the amount of the deficit or theretofore been
surplus determined in (a), adjusted for any effect of limiting a net defined allowed as a
benefit asset to the asset ceiling. deduction, and
(2) is apportioned in
(c) determining amounts to be recognised in profit and loss:
equal parts over a
current service cost. period of ten (10)
any past service cost and gain or loss on settlement. consecutive years
net interest on the net defined benefit liability (asset). beginning with the
(d) determining the remeasurements of the net defined benefit liability (asset),
to be recognised in other comprehensive income, comprising:
year in which the
transfer or payment is
actuarial gains and losses; made.
return on plan assets, excluding amounts included in net interest on the net
defined benefit liability (asset); and any change in the effect of the asset
ceiling, excluding amounts included in net interest on the net defined benefit
liability (asset).
Where an entity has more than one defined benefit plan, the entity applies
these procedures for each material plan separately.
Taxes and Penalties
GAAP Sec 34C, Revenue regulation No. 2
Taxes and penalties are included in the Taxes paid or incurred within the taxable
term, "business expenses". These are year in connection with the taxpayer's
defined as everything incurred / paid to run profession, trade or business, shall be
a business. allowed as deduction, except:
1. income taxes
2. estate and donor's taxes
3. foreign income tax, if not claimed as tax
credit
4. percentage tax on stock transactions
5. value added-tax
6. taxes not related to trade / profession
7. other items related to tax such as:
special assessment tax; surcharges,
penalties.
Taxes expense XXX
Cash/ payable account XXX
Donations
GAAP Sec. 34 H of the NIRC
To be able to deduct donations from the
gross income, it must comply with the
following requirements:
1. There must be an an actual payment of
contribution or gift
2. Recipient must be an entity specified by
law
3. The net income of the institution must
not inure to the benefit of any individual or
private stockholder
There are contributions subject to limit and
those deductible in full. Donations
deductible in full as specified in the tax
laws and other revenue circulars are
donations to the ff:
1. Philippine Government and any of its
agencies or subdivision, used in the
activities of education, health, youth and
sports development, human settlement,
science and culture and economic
development.
2. International organizations in
compliance with treaties
3. Donations to accredited NGOs
All other donations are subject to limit. For
an individual taxpayer, limit is 10% of the
Donations may fall under miscellaneous taxable income derived from business,
expenses. trade or profession or actual contribution
which ever is lower. The same rule applies
to a corporation except that the rate is 5%.
Miscellaneous expenses XXXX
Cash / other payable XXX
Bad debts expense

PAS 32 and PAS 39 Sec. 34 E of the NIRC
Two methods are used to recognize bad Must actually ascertained to be worthless
debts: no difference with the direct write-off
1. Allowance method: bad debts are method
computed as a percentage of receivables
or sales depending on company policy.
Under this method, bad debts are
expensed before they are recognized.
2. Direct write-off method: bad debts are
recognized when they can no longer be
recovered.
Allowance Method:
Bad debts expense XXX
Allowance for Bad debts XXX
When the receivable is ascertained to be

uncollectible
Allowance for Bad debts XXX
Accounts Receivable XXX
Direct Write-off Method:
Bad debts expense XXX

Accounts Receivable XXX

Accounting V Tax Treatment

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Accounting V Tax Treatment

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Fundamental differences between the accounting and tax treatment of certain items of

Accounting Recognition Tax Recognition

Bad debts expense

When the receivable is ascertained to be

Direct Write-off Method:

Bad debts expense XXX

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