1. Method of Accounting As per Income Tax Ordinance 2001

2. What is method of accounting ? It represents the time of recording of income and expense transactions The person uses this record to compute his the financial results Example: To know how much salary you have earned or to know how much profit you have earned 3. Types of Methods Accrual Basis Accounting When amounts are due Cash Basis Accounting When amounts are received 4. What Methods are Allowed by Tax ? General Rule A persons income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person. 5. Example of General Rule Source of Income Individual AOP Company Income from Property Any accounting method Any accounting method Any accounting method Capital Gains Any accounting method Any accounting method Any accounting method Income from Other Sources Any accounting method Any accounting method Any accounting method Salary Cash basis Not Applicable Not Applicable 6. Special Rule For Company a company shall account for income chargeable to tax under the head Income from Business on an accrual basis 7. Special Rule for Individual / AOP while other persons may account for such income Under the head Income from business on a cash or accrual basis 8. Special Rule Source of Income Individual AOP Company Income from Business Cash or Accrual Basis Cash or Accrual Basis Only Accrual Basis 9. Accrual Basis A person accounting for income chargeable to tax under the head Income from Business on an accrual basis shall derive income 10. when it is due to the person and shall incur expenditure when it is payable by the person 11. When is an amount due an amount shall be due to a person When the person becomes entitled to receive it 12. When is an amount payable an amount shall be payable by a person when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy 13. Cash Basis A person accounting for income chargeable to tax under the head Income from Business on a cash basis shall derive 14. income when it is received and shall incur expenditure when it is paid. 15. When is an amount received ? Please turn to Pg 53 Receipt of income.- For the purposes of this Ordinance, a person shall be treated as having received an amount, benefit, or perquisite if it is 16. actually received by the person; applied on behalf of the person, at the instruction of the person or under any law; or made available to the person. 17. Quiz Please answer Q4 (a) September 2006 18. Change in Method Q: Can a person change his method ? A: Yes. By applying to CIT and after the satisfaction of the CIT 19. Cost of Stock For the purposes of determining a persons income chargeable to tax under the head Income from Business for a tax year, the cost of stock-in-trade 20. disposed of by the person in the year shall be computed In accordance with the following formula, namely: 21. (A + B) C where A is the opening value of the persons stock-in-trade for the year; 22. B is cost of stock-in-trade acquired by the person in the year; and 23. C is the closing value of stock-in-trade for the year. 24. Values of Opening Stock Nature of Stock Value of Stock Opening Stock the closing value of the persons stock-in-trade at the end of the previous year or The fair market value of stock-in-trade shall be determined at the time the stock-in-trade is ventured In the business. 25. Values of Closing Stock Nature of Stock Value of Stock Closing Stock The closing value of a persons stock-in-trade for a tax year shall be the lower of cost or net realizable value of the persons stock-in-trade on hand at the end of the year 26. Quiz Please answer Q2 (b) March 2007 27. Record Keeping The Law requires that a taxpayer shall maintain such accounts, documents and records in Pakistan as may be prescribed by Board These records have to be maintained for 5 years after the end of the tax year to which they relate 28. Prescribed Books of Accounts Business Taxpayers 1. Taxpayers with business income up to Rs.200,000 or a new tax payer 2. Taxpayer with business income exceeding Rs.200,000 3. Professionals 4. Manufacturers having turnover more than Rs. 2.5 million 29. Prescribed Books of Accounts Non Business Taxpayers 1. Salary 2. Property 3. Capital Gains 4. Dividend 5. Royalty 6. Profit on Debt