Accounting and Taxation – Page 2

Did you know that in addition to paying your income taxes, you are also required by the BIR to register and maintain books of accounts for your business? Whether you’re a large corporation, a person practicing your profession, or a simple freelancer, you are required to keep a set of official records of all your business-related transactions. The BIR wants you to keep a record of your accounts so that it can also monitor your business transactions. Through your books of accounts, the BIR can easily find out whether your business is earning or not. It can then discover if you are paying the correct taxes for your business. Are you overwhelmed by the number of BIR books of accounts that need to be filled up? This article simplifies everything so you can start keeping a record of your accounts in no time. What Are the 3 Types of Books of Accounts Allowed by the BIR According to Format? 1. Manual Books of Accounts The manual books of accounts are those that you can easily buy in the market, such as book stores and shops selling office supplies. They are the columnar books that you need to fill by handwriting the accounting entries in the respective ledgers, journals, and subsidiary books. These are the easiest to obtain and maintain and are most common, especially for small business owners. a. Documentary Requirements A new set of pre-printed and bound journals, ledgers, and subsidiary books for BIR stampingBIR Form 1905 b. Steps in Registration Step 1: Submit BIR Form 1905 at the RDO or concerned office under the Large Taxpayer Service having jurisdiction over the place where the head office and branch are located Step 2: Present the manual books of accounts for stamping and registration to the BIR c. Deadline You should have your manual books of accounts registered before the deadline for filing the first quarterly income tax return or the annual income tax return, whichever comes earlier1. d. Subsequent Registration Simply label a new portion of the books for each additional year you are using it. You only need to register a new set of manual books of accounts when all the pages of your previously registered books have already been used. After you have used every page of the book you had registered, bring a new set of books to the BIR and follow the steps you made like when you first had them stamped and registered. 2. Loose-Leaf Books of Accounts (With a Permit To Use) This method requires a permit to use from the BIR and combines the manual and the computerized methods of recording your entries. What makes it different from the traditional manual books is that instead of buying pre-printed ledgers and journals from bookstores, you first record the entries on your computer through Excel or other simple computer software. After that, you print the entries you have made, bind them, and present them to the BIR for registration. a. Documentary Requirements The following are the requirements2 you need to be issued a permit to use loose-leaf books of accounts by the BIR. BIR Form 1900Sample format and print-out of the books of accounts you intend to useSworn Statement identifying the type of books your business will use. This includes the invoices, receipts, and other accounting records together with the serial numbers of receipts and invoices to be printed.Sworn Statement confirming your intention and commitment to permanently bind and file the loose-leaf forms within 15 days after the end of each taxable year or upon the termination of each use.Confirmation of payment of the company’s 0605 Annual Registration FeeThe government-issued ID of the authorized representative (if applicable)Special Power of Attorney (for individuals with a representative) or a Board Resolution/Secretary’s Certificate (for corporations and similar types of companies) b. Steps in Registration Step 1: Submit all the documentary requirements at the RDO or concerned office under the Large Taxpayer Service that has jurisdiction over the place where the head office and branch are located Step 2: Wait for BIR to issue your Permit To Use Loose-Leaf Books of Accounts c. Deadline You must register your loose-leaf books of accounts 15 days after the end of each taxable year or within 15 days from the closure of business operations, whichever comes earlier (RMC 29-2019). d. Subsequent Registration Loose-leaf books (including your invoices, receipts, and other accounting records) should be permanently bound and presented for registration together with a sworn statement attesting to the correctness of the entries made, and the number of all invoices, receipts, books of accounts used for the period covered, on or before 15th day following the end of each taxable year or within 15 days from the closure of business operations, whichever comes earlier (RMC 29-2019). 3. Computerized Books of Accounts (With a Permit To Use) This is the most advanced method of recording your accounting entries. It uses a computer program fully designed by in-house programmers of the business or accounting software that is readily available in the market. On the flip side, it has the most requirements for registration. The BIR mandates large taxpayers3 to use a Computerized Accounting System4. a. Documentary Requirements The following are the requirements 5 needed in applying for the registration of computerized books of accounts. Sworn Statement (Annex A-1) or Joint Sworn Statement (Annex A-2), whichever is applicable, with duly attached accomplished Summary of System Description, Commercial Invoice/Receipts/Document Description, Forms/Records, and Reports Specification (Annex A-3)Sample print-out of Principal and Supplementary Receipts/invoicesSample print-out of Books of Accounts (BOA) A printed copy of Audit Trail (activity log generated by the system)Duly accomplished and signed Annex B - Standard Functional and Technical RequirementsIf the software license of the software to be used is under the name of the parent or affiliate: Certification from the purchasing company that the taxpayer-applicant to use the same system b. Steps in Registration Step 1: Submit all the documentary requirements at the RDO or concerned office where the head office and branch are located. Steps 2: Upon submission of complete documentary requirements, an Acknowledgement Certificate shall be issued within 3 working days by the RDO where the taxpayer-user of the system is registered. c. Deadline You should submit the Computerized Books of Accounts and other accounting records in electronic format to the RDO or concerned office of the BIR where the Head Office or Branch is duly registered within 30 days from the close of each taxable year or within 30 days from the closure of business operations, whichever comes earlier (RMC 29-2019). d. Subsequent Registration The requirements for submission of annual Computerized Books of Accounts and other Accounting Records are as follows: Three copies of duly accomplished BIR Form 1905Sworn StatementReceived BIR Form 1905 from the last submissionSoft copy of books restored in CD-R or DVD-R Copy of CAS Permit including Annexes You must submit a new application for registration in case of significant system enhancement, such as the following: Change in the functionalities of the system, particularly on enhancements that will have a direct effect on the financial aspect of the systemAddition or removal of modules or submodules within the system that will have a direct impact on the financial aspect of the system All other enhancements that will be deemed as major system enhancements based on the recommendation of the technical evaluators after the comparative functionalities of the old and upgraded "system” were presented by the taxpayer. What Are the 6 Books of Accounts That the BIR Requires To Be Registered, Filled Out, and Kept by Taxpayers? Non-VAT registered taxpayers are only required to register 4 books accounts. On the other hand, VAT registered taxpayers are required to register all 6 books of accounts. 1. Non-VAT Registered Taxpayers a. General Journal The General Journal is called the book of original entry because this is the usual book of account where you first record your accounting transaction. The following are the usual data you need to record in the General Journal: DateParticulars/DescriptionReference CodeDebit amount with relevant Account NameCredit amount with relevant Account Name Sample transaction: To record the accumulated depreciation for your equipment, you should record the following journal entry: ParticularsDebitCreditDepreciation Expense ₱2,000Accumulated Depreciation₱2,000 Depreciation is when the asset you bought for your business, like your laptop, decreases in value over time. This also means that you estimate the useful life of your asset e.g., 5 years. Over that period, you have to save a portion of your earnings to buy another one when it can no longer be used like before. This portion of income that you save is an expense for the current period. You debit the expense to recognize an increase in your expenses and credit the accumulated depreciation, a contra asset account. This decreases the value of your asset in the books. The supporting documentation for the above could include the purchase receipts for the equipment concerned. For more information on making journal entries and the accounting process, you can read our article about basic bookkeeping. b. General Ledger General Ledger is what we also call the book of final entry. This is because this is the book where you need to summarize the transactions recorded in the General Journal and other Special Journals. The following are the usual data you need to record in General Ledger: Account NameDate Reference CodeDebit amountCredit amount Sample transaction: To record the depreciation expense from the General Journal. DEPRECIATION FOR EQUIPMENT Debit Credit ₱2,000 c. Cash Receipt Journal The Cash Receipts Journal is a specialized journal where you record all your cash receipts before transferring the total amount to General Ledger. The following are the usual data you need to record in the Cash Receipts Journal: DateOfficial Receipt NumberParticulars/DescriptionAmountOther Account Titles relevant to the transaction Sample transaction: When you need to record the receipt of cash from sales to customers. You need to fill the corresponding columns in the Cash Receipts Journal to record a cash sale from your customer. Simply record the actual cash received under the “Cash” column. Record also the amount under the “Sales” column. Don’t forget to write the date and the receipt number. You can also write your customer’s name under the “Particulars” column. Here is how you will record the entry in your Cash Receipts Journal: DateParticulars OR No. AmountAccount Credited 5/10/21Native Style 233 ₱6,300 Sales The supporting document for the above is the Official Receipt issued to the customer. d. Cash Disbursement Journal The Cash Disbursements Journal is a specialized journal where you record all your cash disbursements before transferring the total amount to General Ledger. The following are the usual data you need to record in the Cash Disbursements Journal: DateParticulars/DescriptionAmountOther Account Titles Sample transaction: When you need to record travel expenses paid in cash. If your business includes travel, you must recognize the money you spent by recording the relevant information in your books. Write the date and check number as well as the description of your cash disbursement under “Particulars”. Record the amount you spent under the “Amount” column and the “Travel” column. Here is how you will record the entry in your Cash Disbursements Journal: DateParticularsOR No.AmountAccount Debited5/06/21Sunny Tours100012₱7,200 Travel Expenses You can use receipts from your travel, such as plane tickets, as supporting documents. 2. VAT-Registered Taxpayers All the above books plus the two books below: a. Sales Journal This is a special ledger where you record all your sales transactions. The following are the usual data you need to record in the Sales Journal: DateCustomer’s TINCustomer’s Name (or Customer Code if Customer Master File is available)Address (not necessary if Customer Master File is available)DescriptionReference/Document No./ Sales Invoice No.AmountDiscountVAT Amount (Output Tax)Net Sales If your business is VAT-registered, you need to record your sales in a special book called “Sales Journal”. While you can normally write your cash receipts in a Cash Receipts Book, the Sales Journal would be helpful in recording other information like the TIN, Sales Invoice, and VAT Output Tax from your sales. You can record both cash and account sales in your Sales Journal. For cash sales, record the “Cash” you received. For account sales, write “Accounts Receivable”. For VAT Output Tax, multiply your “Sales” by 12%. To better explain the Debits and Credits for this type of transaction, here are the entries that show how each account would be affected by a cash or account sale: ParticularsDebitCreditAccounts Receivable ₱28,000Sales₱25,000Output VAT (12%x25,000) ₱3,000Cash ₱16,800 Sales ₱15,000 Output VAT (12%x15,000)₱1,800 You need to know the above basic entries when you post the balances later on to your General Ledger. Supporting documents: Sales Invoice, Official Receipt b. Purchase Journal In addition to the Sales Journal, you also need a Purchase Journal if you are a VAT-registered business. This is a special ledger where you record all your purchase transactions. Here, you need to write additional information like the TIN, Purchase Invoice/Reference Receipt, and VAT Input Tax from your purchases. The following are the usual data you need to record in the Purchase Journal: DateSupplier’s TINSupplier’s Name (or Vendor’s Code if Vendor Master File is available)Address (not necessary if Vendor Master File is available)DescriptionReference/Document No./Sales Invoice No.AmountDiscountVAT Amount (Input Tax)Net Purchases You can record both cash and account purchases in your Purchases Journal. For cash purchases, record the “Cash” you paid. For account purchases, write “Accounts Payable”. For VAT Input Tax, simply write the amount contained in your receipt. This amount represents 12% of the goods or services you purchased. To better explain the Debits and Credits for this type of transaction, presented below are the entries that show how each account would be affected by a cash or account purchase. Note that not all purchases would be from VAT purchases. For purchases involving Non-VAT transactions, you cannot recognize VAT Input Tax. Sample transactions: ParticularsDebit CreditRepairs ₱1,600 Input VAT (12%x1600) ₱192Accounts Payable ₱1,792Office Supplies ₱1,700 Cash ₱1,700 You need to know the above basic entry when you post the balances later on to your General Ledger. Supporting documents: Invoice, Official Receipt How Do You Take Care of Your Books of Accounts? How Long Do You Need To Keep Them? 1. Brief Description of the Books of Accounts and the Period They Need To Be Preserved Your books of accounts, including subsidiary books and other accounting records, need to be kept and preserved for 10 years. The period of 10 years starts from the day following the deadline for filing an ITR. If the ITR is filed after the deadline, the period begins from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts6. Accounting records referred to above include invoices, receipts, vouchers, returns, and other documents supporting the entries in the books of accounts. 2. The Types of Document Formats Needed To Be Kept (Manual or Electronic) Within the first 5 years as stated above, you need to retain hard copies of the books of accounts, including subsidiary books and other accounting records. After that, you only need to retain an electronic copy of the books of accounts, subsidiary books, and other accounting records. The electronic storage system should follow the requirements below: There should be an accurate and complete transfer of the images of the hardcopy of the books of accounts, including subsidiary books and other accounting records, to an electronic storage media; andThey should index, store, preserve, retrieve, and reproduce the electronically stored images of the hardcopy of the books of accounts, subsidiary books, and other accounting records. The electronic storage system must also include: Reasonable controls to ensure integrity, accuracy, and reliabilityReasonable controls to prevent and detect any unauthorized creation of, addition to, alteration of, deletion of, or deterioration of electronically stored books of accounts, subsidiary books, and other accounting recordsInspection and quality assurance program supported by regular evaluations of the electronic storage system (periodic checks of electronically stored books of accounts, subsidiary books, and other accounting records)Retrieval system that includes an indexing systemAbility to reproduce legible and readable hardcopies of electronically stored books of accounts, subsidiary books, and other accounting records. All books of accounts, subsidiary books, and other accounting records reproduced by the electronic storage system must be easily read when displayed on a video display terminal and when reproduced in hardcopy. Letters and numbers shown should be quickly identified by observers (RMC 29-2019 and RR 5-2014). 3. The Place Where the Documents Should Be Kept You must always keep the books of accounts, registers, records, vouchers, and other supporting documents in your place of business7 . 4. Condition of Documents Your books of accounts as well as the registers, records, vouchers, and other supporting documents should be kept intact, unaltered, and unmutilated. This means that these should not be torn or damaged. Make sure they are not scratched, smudged, or stained (RMC 29-2019 and RR 17-2013). 5. Responsibility of CPA in Keeping Records of the Books of Accounts Your Certified Public Accountant (CPA) should preserve the electronic copies of your business’s audited and certified financial statements (including audit working papers) for 10 years from the due date of filing the ITR or the actual date of filing, whichever comes later (RR 5-2014). 6. BIR Inspection of Records Your books of accounts and related records may be examined and inspected by the BIR once in a taxable year. The exceptions to this are as follows8: In cases of fraud, irregularity, or mistakesWhen the taxpayer requests reinvestigationWhen there is a need to verify compliance with withholding tax laws and regulationsWhen the taxpayer’s capital gains tax liabilities need to be verifiedWhen the BIR Commissioner decides to use his power under Section 5(B) of the NIRC. This is to obtain information involving the examination of other taxpayers. Examination and inspection of books of accounts and other accounting records will take place in your office or place of business or the office of the BIR. What Are the Penalties for Non-Registration, Non-Retention, and Other Violations on the BIR Books of Accounts? The penalties to be imposed for violations regarding the BIR books of accounts can be light or heavy depending upon the kind of violation and the intention of the person making the violation. Intentional offenses and fraud have greater penalties and may even include imprisonment. Here are some of the violations and penalties related to the books of accounts: ViolationPenaltyFailure to register the books of accounts ₱1,000 but not exceeding ₱25,000 for the calendar year (SEC. 250 of the NIRC).Late registration of books of accounts₱1,000 but not exceeding ₱25,000 for the calendar year (SEC. 250 of the NIRC).Failure to keep/preserve the books of accounts₱1,000 to ₱50,000 depending upon one’s gross annual sales, earnings, or receipts (RMO No. 7-20159 .Lost books of accounts₱1,000 but not exceeding ₱25,000 for the calendar year (SEC. 250 of the NIRC).Failure to provide the required records to the BIRNot less than ₱5,000 but not more than ₱10,000 and imprisonment of not less than 1 year but not more than 2 years (SEC.266 of the NIRC).Compromise penalty of ₱10,000 for the first offense and ₱20,000 for the second offense. There will no longer be any compromise for subsequent violations (RMO No. 7-2015).False entry/fictitious name in the books of accountsFine of not less than ₱50,000 but not more than ₱100,000 and imprisonment of not less than 2 years but not more than 6 years. For foreigners, deportation after serving his/her sentence (RMO No. 7-2015).Keeping two or more books of accountsFine of not less than ₱50,000 but not more than ₱100,000 and imprisonment of not less than 2 years but not more than 6 years. For foreigners, deportation after serving his/her sentence. (RMO No. 7-2015)Books kept in a native language, English, or Spanish differ greatly from books kept in another languageFine of not less than₱50,000 but not more than ₱100,000 and imprisonment of not less than 2 years but not more than 6 years. For foreigners, deportation after serving his/her sentence (RMO No. 7-2015).Failure to keep books of accounts or records in a native language, English. or Spanish or make a true and complete transaction₱1,000 to ₱50,000 depending upon one’s gross annual sales, earnings, or receipts (RMO No. 7-2015).Note: For corporations, associations, or general co-partnership, there shall be a fine of not less than P50,000 but not more than ₱100,000 for every violation in addition to the penalties mentioned above (SEC.256 of the NIRC). Frequently Asked Questions 1. What is the difference between the loose-leaf and the computerized format of the books of accounts? Loose-Leaf books of accounts are still considered manual books. There is no program used to enter the accounting entries electronically so that they would automatically be posted in the ledgers and thereby create financial statements from their balances. The entries are merely encoded or typed with the use of computers and then printed out. Computerized books of accounts use a computer system that automates the accounting process from the journal entries to the ledger balances and the creation of financial statements. 2. What is the difference between the General Journal and General Ledger? The General Journal is the book of original entries. This is where the accounting entries are first recorded. General Ledger is the book of final entry. Each account has its own ledger and reflects the balance of the account after the journal transactions have been posted. 3. When do you record transactions in General Ledger? You can record transactions to General Ledger after you have posted the accounting entries in the respective Journals (General Journal, Cash Receipts Journal, Sales Journal, etc.). For practical reasons, however, you can post summaries of said transactions at the end of a given period e.g., monthly. 4. Why do you need other special journals in addition to the General Journal? Special Journals help in the easier recording of transactions. While every transaction can be recorded in the General Journal, it helps to have Specialized Journals so that repetitive transactions like sales, purchases, cash receipts, or cash disbursements can be posted more quickly and more efficiently. The Specialized Journals also contain specific information that can easily be accessed for similar types of records such as when you need to compute the VAT Input and VAT Output accounts. 5. Can you register more than one set of books? No, you may not. The Tax Code expressly says that any person who keeps 2 or more sets of books of accounts will be punished by a fine not less than P50,000 but not more than P100,000. You will also be imprisoned for not less than 2 years but not more than 6 years (SEC.257 of the NIRC and RMO No. 7-2015). 6. Can you use computer printouts and simply paste them to your manual books of accounts? No, you may not. All entries in the manual books of accounts should be handwritten. Printouts of the accounting records pasted/glued/inserted onto pages/sheets of the registered Manual Books of Accounts are prohibited and subject to penalty. See penalties above for failing to preserve/keep the books of accounts (RMC 29-2019). 7. Why do we have only four books of accounts for Non-VAT registered taxpayers? There are additional transactions that need to be recorded for VAT registered taxpayers. This is the reason why they should use the Sales Journal and the Purchases Journal in addition to the four books of accounts that should be used by Non-VAT taxpayers. These transactions are those that are related to computing the Net VAT payable by the taxpayer at the end of a given period. 8. Do you need a CPA to record the transactions for you in the books of accounts? Businesses with gross annual sales, earnings, receipts, or output that does not exceed P3,000,000 can forego having their books audited by independent CPAs. They can, however, employ accountants to help them record and summarize the accounting entries in their books of accounts (RMC 29-2019 and RA 1096310 . 9. What happens when you lose the books of accounts? You should prepare an Affidavit of Loss explaining the valid reason for losing your books of accounts. You then have to notify the BIR as soon as possible. Depending upon the discretion of the BIR, you may receive a penalty for failing to preserve your books of accounts. The penalty amount is P1,000 but does not exceed P25,000 for the calendar year (SEC. 250 of the NIRC). To help you save time, here’s an Affidavit of Loss template you can download for free. 10. When should you renew the books of accounts and how? You should only renew your manual books of accounts after all the pages have been used. It is not necessary to register a new set yearly. 11. How long am I required to use the books of accounts? Is there a time when the BIR books of accounts are longer needed? You are required to record your business transactions in your books of accounts as long as your business is operating. Upon the retirement of your business, you should submit your books of accounts within 10 days to the BIR for examination. If your business is a corporation or a partnership, you should also inform the BIR if you are planning for a business dissolution. This is so that you may be cleared of any tax liability (SEC. 235 of the NIRC). 12. Does the BIR really check the books of accounts? According to the “Taxpayer’s Bill of Rights”11, every taxpayer’s books of accounts may be inspected by the BIR. They prepare an audit program to select the tax returns they will examine for the year. Meanwhile, SEC. 235 of the NIRC informs us that the BIR may examine your books once in a taxable year. Some exceptions include fraud cases or when there is a need to obtain information regarding other taxpayers. References