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• Income means all wealth which flows into the taxpayer other than a
mere return of capital. It is derived from:
• The use or employment of labor or capital, or both labor and capital; and/or
• From the sale or other disposition of assets or property.
SOURCES OF INCOME
• Under the Tax Code, income derived from whatever source forms part
of the taxpayer’s income. This includes the following:
• Treasure found or punitive damages representing profits lost;
• Amount received by mistake (Javier v. CA, 199 SCRA 824)
• Exception to the rule that Amount received by mistake is not taxable.
• Cancellation of Taxpayer’s indebtedness;
• Payment of usurious interest;
• Illegal gains
• Tax Refund
• Bad Debt Recovery
“INCOME” DISTINGUISHED FROM “CAPITAL”
Capital Income
Fund Flow
Wealth Service of wealth
Tree Fruit
• CASH METHOD
• ACCRUAL METHOD
ACCOUNTING METHOD
• CASH METHOD
• a method of accounting whereby all items of gross income received during
the year shall be accounted for in such taxable year and that only expenses
actually paid shall be claimed as deductions during the year
ACCOUNTING METHOD
• ACCRUAL METHOD
• method of accounting for income in the period it is earned, regardless of
whether it has been received or not. Expenses are accounted for in the
period they are incurred and not in the period they are paid.
DIFFERENCE OF CASH METHOD FROM ACCRUAL
METHOD OF ACCOUNTING
CASH METHOD ACCRUAL METHOD
income is reported in the income is reported in the
year payments are year it is earned while
received while expenses expenses are deducted in
are deducted in the year the year it is incurred,
paid. regardless of receipt or
disbursement of cash.
ADDITIONAL INFO
• Can a taxpayer use a combination of two or more methods of
accounting?
• No. The rule is that a taxpayer may use any one method of accounting but not
a combination of two or more methods of accounting for each type of
business during the taxable year. The use of a hybrid method of accounting is
not allowed (CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974])