Financial Risk Manager

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Tax accounting: Cash vs. Accrual
Tuesday, February 17, 2009

Query from Khurrum Shahzad, M.Com, ACMA, Head of Accounts Deptts. Rahim Baksh Group:

"A recreational club has received amounting Rs.2,000,000 on account of life membership of a person with family and charged 1,500/- on monthly basis. Can that club defer Rs.2,000,000 on different coming years rather than show as income of the year when it is received? Please advice from taxation point of view."

Answer:
Section 32. Method of accounting states that a company shall account for income chargeable to tax under the head “Income from Business” on an accrual basis, while other persons may account for such income on a cash or accrual basis.
Further, a person’s income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person (wether accrual or cash)

Section 33. Cash-basis accounting states that a person accounting for income chargeable to tax under the head “Income from Business” on a cash basis shall derive income when it is received and shall incur expenditure when it is paid.

Section 34. Accrual-basis accounting states that;

A person accounting for income chargeable to tax under the head “Income from Business” on an accrual basis shall derive income when it is due to the person and shall incur expenditure when it is payable by the person.

Due to a person means when the person becomes entitled to receive it even if the time for discharge of the entitlement is postponed or the amount is payable by instalments.
Payable by a person means when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy.

Taxable Income:

In the light of above provisions of income tax ordinance, 2001 that club must adopt accrual basis accounting (in case of company) and may adopt accrual basis accounting (in case of other person like AOP). On the basis of accrual accouting Rs.2,000,000/- would be treated as income when club is entitled to receive it irrespective the amount is postponed or payable in instalments.

Ref: Income Tax Ordinance, 2001

Labels: Taxation

posted @ 12:18 PM,

2 Comments:

At February 18, 2009 at 10:07 AM, Anonymous said...: Great
It Enlitenten me on the Tax treatment of Future income under Acrrual Tax And Cash Basis Tax Calculation Under ITO 2001.

Thanks
Fouad ur Rehman.
At November 4, 2009 at 5:44 PM, Tax Jobs said...: Your blog is nice to use. Thank You.