Session 3/3 Day 1. Audio Commentary by Anthony Williams (FPFA,LLB) to be added soon. For 1 on 1 discussion call +92-321-4409009, 0321-4409009, 92-42-35925972

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 person’s 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 person’s 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 person’s
• 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 person’s 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 person’s
stock-in-trade
for a tax year
shall be
the lower of cost
or
net realizable value
of the person’s
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