How to Compute Quarterly Income Tax

Return: Philippines (1701Q)

JUNE 17, 2011 BY VICTORINO ABRUGAR

How to compute quarterly income tax return in the Philippines for self-
employed individuals? If you are a professional who practice your profession
or a self-employed individual engaged in a sole proprietorship business, you
may be looking for a guide on how to prepare your BIR Form 1701Q. BIR
form 1701Q is filed quarterly for the first quarter, second quarter and third
quarter. For the annual income tax return, the BIR form 1701 is used. The
following are the steps, procedures, requirements, tips and other important
information you need to know in computing and preparing your quarterly
income tax returns.

What is the BIR form to be used?

The return we need to file is BIR Form No. 1701Q: Quarterly Income Tax
Return for Self-employed Individuals, Estates, and Trusts (Including Those
with both Business and Compensation Income)

The following are the documentary requirements that need to be attached with
the form, if applicable:

1. Certificate of Income Tax Withheld at Source (BIR Form 2307), if applicable

2. Certificate of Income Payments not Subjected to Withholding Tax (BIR
Form 2304) if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Previously filed return, if an amended return is filed for the same quarter

Who are required to file BIR Form 1701Q?

This return shall be filed in triplicate by the following individuals regardless of
amount of gross income:

1) A resident citizen engaged in trade, business, or practice of profession

within and without the Philippines.

2) A resident alien, non-resident citizen or non-resident alien individual

engaged in trade, business or practice of profession within the Philippines.

3) A trustee of a trust, guardian of a minor, executor/administrator of an estate,

or any person acting in any fiduciary capacity for any person, where such
trust, estate, minor, or person is engaged in trade or business.

When are the deadlines or due dates of

filing the return?
The following are the deadlines for manual filing of BIR Form 1701Q :
1st qtr: On or before April 15 of the current taxable year
2nd qtr: On or before August 15 of the current taxable year
3rd qtr: On or before November 15 of the current taxable year

How to compute and prepare the quarterly

income tax returns?
The following are the steps in the computation and preparation of your
quarterly income tax returns. You can also check the sample computation we
have provided below. For better understanding, please download BIR Form
1701Q here.

STEP 1: Fill up completely the Part 1 of BIR form 1701Q with the applicable
information, which include your Taxpayer Identification Number (TIN),
registered name, registered address, line of business or occupation, method
of deduction (itemized deduction or optional standard deduction), and other
information that are applicable. Also fill in the year, quarter, check if amended
or not, and the no. of sheet/s attached which can be found on the top of the
return.

STEP 2: Fill up Part 2 of the form, which is the computation of the quarterly
income tax. Refer to the form 1701Q to check the line items and their
corresponding reference numbers.

Step 2.1: Determine your [26] Sales/Revenues/Receipts/Fees. Add any [27]

Amount You Received as a Partner from General Professional
Partnership (except loans), if any, to arrived at [28] Total.
Step 2.2: Calculate your [30] Gross income from Operation by subtracting
your [29] Cost of Sales/Services to your [28] Total in Step 2.1. Costs of
services are the direct costs attributable to the rendering of your services,
such as the depreciation of the building for business engage in building rental,
internet cost for internet café business, salaries of janitors for business
engaged in janitorial services, and others.

Step 2.3: Compute your [32] Total Gross Income by adding [30] Gross
Income to your[31] Other Income, if any.

Step 2.4: Determine and compute your total allowable [33] Deductions for
the quarter. You can choose one from the two (2) methods of deduction: (a)
Itemized deduction or the (b) Optional Standard Deduction (OSD). Your
chosen method of deduction will be your method of deduction for the entire
taxable year. The following are the bases for computing the two methods:

Option 1: Optional Standard Deduction (OSD) – A maximum of 40% of their

gross sales or receipts shall be allowed as deduction in lieu of the itemized
deduction. This type of deduction shall not be allowed for non-resident aliens
engaged in trade or business. Example, if you have P100,000 gross sales or
receipts for the quarter, you can claim an allowable deduction (OSD) of
P40,000 (P100,000 x 40%), if you choose OSD instead of Itemized deduction.

Option 2: Itemized Deduction – There shall be allowed as deduction from

gross income all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on or which are directly attributable to the
development, management, operation and/or conduct of the trade, business
or exercise of a profession including a reasonable allowance for salaries,
travel, rental and entertainment expenses. Examples of itemized deductions
are the following:

Step 2.5: Calculate your [34] Taxable Income this Quarter by deducting
your [33] Allowable Deduction computed in Step 2.4 to your [32] Total
Gross Income.

Step 2.6: Compute your [36] Taxable Income to Date by adding your [35]
“Taxable Income for the Previous Quarter/s” during the taxable year to
your [34] Taxable Income this Quarter. Take the following guides:

1. For the 1st quarter, you don’t have [35] Taxable Income for the
Previous Quarter/ssince it is the beginning quarter of the taxable year.

2. For the 2nd quarter, your [35] Taxable Income for the Previous
Quarter/s is equal to your [34] Taxable Income this Quarter in the 1st
quarter.

3. For the 3nd quarter, your [35] Taxable Income for the Previous
Quarter/s is equal to the “total of your taxable [34] Income this
Quarter in the 1st and 2nd quarters” or the “total [36] Taxable income to
Date of the 2nd quarter”.

4. There is no 1701Q filed and computed in the fourth quarter. Instead the
annual income tax return (BIR Form 1701) is filed and computed. To
learn how to compute annual income tax for self-employed please read
our article on “How to compute income tax in the Philippines for self-
employed individuals”.
Step 2.7: Compute your [37] Tax Due using the Graduated Tax Table for
Individuals. You can jump below Step 2.9 to see tax rates table and our
sample computation.

Step 2.8: Compute your [39] Tax Payable by deducting to your [37] Tax
Due to your [38] total tax Credits/Payments for the Quarter, which include
[38A/B] Prior Year’s Excess Credits, [38C/D] Tax Payment(s) for the Previous
Quarter(s), [38E/F] Creditable Tax Withheld for the Previous Quarter(s),
[38G/H] Creditable Tax Withheld Per BIR Form 2307 for the Quarter, and
[38I/J] Tax Paid in Return Previously Filed (if you are filing an amended
return).

Step 2.9: Compute your [41] Total Amount Payable by adding any [40]
Penalties(surcharge, interest and compromise), if there is any. Penalty is
charged for late filing. To learn more about computing penalties, please check
our article “How to compute BIR penalties”.
Sample computation of quarterly income tax due and payable

Example: Let us assume the following financial information of J. Santos,

single and Filipino Citizen, for the 3rd Quarter of 2011. Santos has chosen to
claim itemized deduction, instead of Optional Standard Deduction (OSD). He
is also filing the return before the due date, which is also not an amended
return.

Gross sales: P300,000

Cost of Sales: P 180,000
Expenses (rent, depreciation, salaries, taxes and licenses): P 60,000
Other income: P 20,000
Total taxable income for the 1st and 2nd Quarters: P40,000
Income tax paid for the 1st and 2nd Quarters: P1,000
Creditable tax withheld for the previous quarters: P3,000
Creditable tax withheld per BIR form 2307 for this quarter: P2,000
What is your income tax due and payable for the 3rd quarter of 2011?

Answers and computation:

Gross Sales [26] P 300,000

Add: Share from Gen. Prof. Partnership [27] 0
Total [28] 300,000
Less: Cost of Sales [29] 180,000
Gross Income from Operation [30] 120,000
Add: Other Income [31] 20,000
Total Gross Income [32] 140,000
Less: Deductions [33] 60,000
Taxable Income This Quarter [34] 80,000
Add: Taxable Income for the Previous Qtrs [35] 40,000
Taxable Income to Date [36] 120,000
Tax Due [37] * 18,500
Less: Tax Credits/Payments: [38]
Tax Paid for the Previous Quarters 1,000
Creditable tax withheld for the previous quarters 3,000
Creditable tax withheld per BIR form 2307 for this
qtr 2,000
Tax Payable [39] 12,500
Less Penalties [40] 0
Total Amount Payable [41] P 12,500
* Computation of tax due:

Since P120,000 is under the “over P70,000 but not over P140,000, your tax
due is equal to P8,500 + 20% of the Excess of 70,000.
Tax Due = P8,500 + 20% of the Excess over 70,000.
Tax Due = 8,500 + [20% (120,000 – 70,000)]
Tax Due = 8,500 + (20% x 50,000)
Tax Due = 8,500 + 10,000
Tax Due = P18,500

Notes:
1. The personal and additional exemptions of the taxpayer are only claimed
on the computation of annual income tax return..
2. Compensation income need not be reported in the Quarterly Income Tax
Return. The same shall be reported in the Annual Income Tax Return only.

Step 2.10. If you are filing consolidated income tax return with your spouse,
aggregate your income tax payable.

Step 2.11 Put your signature over your printed name. Also fill the Title/Position
of Signatory.

STEP 3: Fill out the details of payment in Part III

How to file the quarterly income tax

returns?
The following are the procedure in filing the quarterly income tax returns:

1. Fill-up BIR Form 1701Q in triplicate.

2. If there is payment:

 Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue

District Office where you registered and present the duly accomplished
BIR Form 1701 Q, together with the required attachments and your
payment.
  In places where there are no AABs, proceed to the Revenue Collection
Officer or duly Authorized City or Municipal Treasurer located within the
Revenue District Office where you are registered and present the duly
accomplished BIR Form 1701Q, together with the required attachments
and your payment.

 Receive your copy of the duly stamped and validated form from the
teller of the AABs/Revenue Collection Officer/duly Authorized City or
Municipal Treasurer.

3. For “No Payment” Returns including refundable/ creditable returns with

excess tax credit carry over and returns qualified for second installment:

 Proceed to the Revenue District Office where you are registered or to

any Tax Filing Center established by the BIR and present the duly
accomplished BIR Form 1701Q, together with the required attachments.

 Receive your copy of the duly stamped and validated form from the
RDO/Tax Filing Center representative.

Reference: Bureau of Internal Revenue Philippines

How to Compute Income Tax in the

Philippines (Single Proprietorship)
FEBRUARY 7, 2011 BY VICTORINO ABRUGAR

203 Share

Tweet

1 Share
5 Share

1 Pin

0 Share

How to compute annual income tax in the Philippines for self-employed

individuals, such as proprietors and professionals? Computing income tax
expense and payable is different for individuals and corporations. Taxable
corporations may be taxed using a fixed income tax rate. On the other hand, if
you are a self-employed professional or an owner of a single proprietorship
business, your income tax expense is computed using a graduated tax rate. It
is a progressive tax which the tax rate increases as the taxable base amount
increases. This means that the higher taxable income you have, the higher
your income tax expense is. The following are the requirements, instructions
and procedures to compute and file your income tax return.

The tax form you will use

For self-employed individuals such as proprietors, professionals and those
with both business and compensation income, you will useBIR Form
1701 (please click here to download form). It must be prepared in 3 copies
(one for BIR, one for the Authorized Agent Bank and one for your copy).

Documentary requirements
Below are the documentary requirements that should be attached with the
return, if applicable. For taxpayers earning both business income and
compensation income, BIR Form 2316 should be attached.

1. Certificate of Income Tax Withheld on Compensation (BIR Form 2316), if

applicable
2. Certificate of Income Payments not Subjected to Withholding Tax (BIR
Form 2304) if applicable
3. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if
applicable
4. Waiver of the Husband’s right to claim additional exemption, if applicable
5. Duly approved Tax Debit Memo, if applicable
6. Proof of Foreign Tax Credits, if applicable
7. Income Tax Return previously filed and proof of payment, if filing an
amended return for the same year
8. Account Information Form (AIF) or the Certificate of the independent CPA
with Audited Financial Statements if the gross quarterly sales, earnings,
receipts or output exceed P 150,000.00
9. Proof of prior year’s excess tax credits, if applicable

Computation of Income Tax Due and

Payable
The following are simple steps to calculate your income tax payable.
1. Compute your taxable Compensation Income (positive) or excess of
Deductions over Taxable Compensation Income (negative).Here is how
you will compute it.

a. Determine your Gross Taxable Compensation Income. This is the income

you earn from your employer during the taxable year. If you are earning purely
from your business or you are not employed, then you can leave it blank.
b. Determine your premium paid on Health and or Hospitalization, which
should not exceed Php 2,400 per year. If none, then leave it blank. *
c. Determine your Personal and Additional Exemptions as follows:

Personal Exemptions:

For single individual or married individual judicially decreed as legally

separated with no qualified dependents………………………………………P
50,000.00
For head of family……………………………P 50,000.00
For each married individual *…………P 50,000.00

Note: In case of married individuals where only one of the spouses is

deriving gross income, only such spouse will be allowed to claim the
personal exemption.

Additional Exemptions:

* For each qualified dependent, a P25,000 additional exemption can be

claimed but only up to 4 qualified dependents
The additional exemption can be claimed by the following:
* The husband who is deemed the head of the family unless he explicitly
waives his right in favor of his wife
* The spouse who has custody of the child or children in case of legally
separated spouses. Provided, that the total amount of additional
exemptions that may be claimed by both shall not exceed the maximum
additional exemptions allowed by the Tax Code.
* The individuals considered as Head of the Family supporting a
qualified dependent

d. Add the amounts in (b) and (c), then deduct the total from the amount
in (a) to arrive at your taxable Compensation Income (positive) or excess
of Deductions over Taxable Compensation Income (negative).

2. Compute your gross taxable business or professional income. Here is

how you will calculate it.

a. Determine your sales, receipts or revenues for the taxable year.

b. Determine your cost of sales or cost of services.
c. (a) minus (b) will simply give you your gross taxable or professional income.

3. Compute your total taxable business or professional income by simply

adding result in (2) and your other taxable income.

4. Compute your Net Income. Your Net Income is equal to result in (3) minus
your allowable deductions. Your allowable deductions can be either:

a) Optional Standard Deduction – an amount not exceeding 40% of the net

sales for individuals and gross income for corporations; or
b) Itemized Deductions which include the following:

 Expenses

 Interest

 Taxes

 Losses

 Bad Debts

 Depreciation

 Depletion of Oil and Gas Wells and Mines

 Charitable Contributions and Other Contributions

 Research and Development

 Pension Trusts

Note: A taxpayer engaged in business or in the practice of profession

shall choose either the optional or itemized deduction (described
below). He shall indicate his choice by marking with “X” the appropriate
box, otherwise, he shall be deemed to have chosen itemized deduction.
The choice made in the return is irrevocable for the taxable year
covered.

Reminder: There are expenses that have ceilings or limits as deductibles to

your taxable income, such as interest expense, representation and
entertainment expense, etc. To learn more, please read our article “Deductible
Expenses (Allowable Deductions) in the Philippines”.
5. Compute you total taxable income by adding the result in #4 (Net
Income) to the result in #1 (taxable Compensation Income or excess of
Deductions over Taxable Compensation Income). If the result is negative or it
becomes a loss, then you will not have a tax due for the taxable year,
otherwise, continue to the next step.

6. Compute your Income Tax Due. This is also your income tax expense
incurred during the taxable year. Calculate your tax due for the taxable year
using the following tax rate table.

Note: When the tax due exceeds P2,000.00, the taxpayer may elect to pay in
two equal installments, the first installment to be paid at the time the return is
filed and the second installment 15 of the same year at on or before July the
Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District
Office (RDO) where the taxpayer is registered.
7. Compute your Income Tax Payable. This is the tax you are still liable at
the end of the year. To calculate your income tax payable, deduct your income
tax due with the following tax credit/payments, if available.

-Prior Years’ Excess Credits

-Tax Payments for the First Three Quarters
-Creditable Tax Withheld for the First Three Quarters
-Creditable Tax Withheld Per BIR Form No. 2307 for the 4th Qtr.
-Tax Withheld Per BIR Form No. 2316
-Foreign Tax Credits
-Tax Paid in Return Previously Filed, if you have already file and this is your
Amended Return
-Other Payments made

8. Compute your Total Payable. If unfortunately, you fail to pay your income
tax on or before the due date, the following penalties will be imposed and will
be added to your total amount payable.

1. A surcharge of twenty five percent (25%) for each of the following violations:
a) Failure to file any return and pay the amount of tax or installment due on or
before the due dates;
b) Filing a return with a person or office other than those with whom it is
required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return, or
the full amount of tax due for which no return is required to be filed, on or
before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its payment
in the notice of Assessment (Delinquency Surcharge).
2. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case
any payment has been made on the basis of such return before the discovery
of the falsity or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the Code or
by rules and regulations; or
b) In case a false or fraudulent return is willfully made.

3. Interest at the rate of twenty percent (20%) per annum, or such higher rate
as may be prescribed by rules and regulations, on any unpaid amount of tax,
from the date prescribed for the payment.

A simple illustration of computing total income tax payable is shown

below:

Gross Income (Gross business income, compensation income and other

income)
Less: Allowable Deductions (Itemized or Optional) (refer to # 4)
Equals: Net Income
Less: Personal & Additional Exemptions (see #1)
Equals: Net Taxable Income
Multiply by Tax Rate (5 to 32%) (refer to # 6)
Equals: Income Tax Due
Less: Tax credits & payments (refer to #7)
Equals: Income tax payable
Add: Penalties (Surcharge, interests & compromise) (refer to #8)
Equals: Total amount payable
Procedures for paying and filing
1. Fill-up BIR Form 1701 in triplicate copies.

2. If there is payment:
a. Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue
District Office where you are registered and present the duly accomplished
BIR Form 1701, together with the required attachments and your payment.
b. In places where there are no AABs, proceed to the Revenue Collection
Officer or duly Authorized City or Municipal Treasurer located within the
Revenue District Office where you are registered and present the duly
accomplished BIR Form 1701, together with the required attachments and
your payment.
c. Receive your copy of the duly stamped and validated form from the teller of
the AABs/Revenue Collection Officer/duly Authorized City or Municipal
Treasurer

3. For “No Payment” including refundable/ creditable returns, returns with

excess tax credit carry over, and returns qualified for second installment:
a. Proceed to the Revenue District Office where you are registered or to any
established Tax Filing Centers established by the BIR and present the duly
accomplished BIR Form 1701, together with the required attachments.
b. Receive your copy of the duly stamped and validated form from the
RDO/Tax Filing Center representative.

Deadline
Final Adjustment Return or Annual Income Tax Return – On or before the
15th day of April of each year covering income for the preceding year

For more information, such as who are the individuals exempt from income
tax and other tax related information, please visit this web page (Tax Info)
from the Bureau of Internal Revenue (BIR). Updates to this article will be
provided when necessary.

Sample Balance Sheet and Income

Statement
MARCH 14, 2012 BY VICTORINO ABRUGAR 2 COMMENTS

10 Share

Tweet

0 Share

1 Share

0 Pin

0 Share

The following are sample balance sheet (statement of financial position), income statement, and
statement of changes in owner’s equity for an individual or sole proprietorship business. These
sample financial statements are actually the ones we have discussed and prepared in our previous
accounting discussions. The account titles and balances presented on these reports are derived
from the adjusted trial balance we have made during our previous post. To learn how we’ve
prepared the balance sheet, please read our article on “how to prepare a balance sheet”. To learn
how we have created the income statement, please read our article titled “how to prepare an
income statement. For the preparation of the statement of owner’s equity, please read our article
on how to make a statement of changes in owner’s equity. You may also browse all our articles
about accounting in ouraccounting category page.

Sample balance sheet:

Sample income statement:
Sample statement of owner’s equity
How to Prepare a Balance Sheet
(Statement of Financial Position)
MARCH 12, 2012 BY VICTORINO ABRUGAR LEAVE A COMMENT

8 Share

Tweet

1 Share

12 Share

0 Pin

0 Share

The balance sheet or the statement of financial position is one of the major
components of financial statements, which include the income statement,
statement of cash flow, statement of changes in equity and the notes to
financial statements. The balance sheet gives readers of financial statements
the snapshot of an entity’s financial condition. It presents the company’s
assets, liabilities and equity, which show the basic accounting equation
(assets = liabilities + equity), where total assets must always be balanced with
the sum of the total liabilities and total equity. If you own a business and you
have an accountant, the accountant will be the one who will prepare your
balance sheet. But small business owners or even professionals and
freelancers who just want to make a simple balance sheet can try to prepare
this statement on their own.

Steps to be made before the preparation of

balance sheet
In the accounting cycle, the balance sheet and other financial statements are
prepared after the adjusted trial balance is done. Preparing the balance sheet
without doing the previous steps of the accounting cycle will give the preparer
troubles in coming up a fair balance sheet statement. Thus, if you want to
learn how to prepare a balance sheet or statement of financial position, you
should first learn the following steps of the accounting cycle.

1. How to record journal entries

2. How to post entries to the general ledger
3. How to prepare a trial balance
4. How to make adjusting journal entries
5. How to prepare an adjusted trial balance

You may read and study the above articles up to the preparation of the
adjusted trial balance. In those articles, we have used the same examples of
transactions and events, from recording the journal entries up to the
adjustment of the trial balance. We will now then use the account titles and
balances in the adjusted trial balance in our preparation of the balance sheet.
Here’s the adjusted trial balance we have prepared from our previous article.
How to prepare a balance sheet from the
adjusted trial balance
Once the trial balance is adjusted and updated to correct errors and other
adjustments, we can now prepare the balance sheet and income statement.
The following are the simple steps you need to know in preparing a simple
balance sheet:

1. Start with the heading. The heading includes the name of entity (individual
or company), name of the statement (balance sheet), and the reporting period
(ex. as of December 31, 2011). Some complex forms of businesses may
include a more detailed heading, such as when reporting a consolidated
balance sheet and or when presenting comparative years. Below is an
example of a simple heading in the balance sheet we have prepared from our
sample adjusted trial balance. You may also indicate the local currency (e.g.,
Amounts in Philippine Pesos) used in your balance sheet statement.

2. Present your assets. Classify you assets into current and noncurrent
assets. Current assets are cash; cash equivalent; assets held for collection,
sale, or consumption within the entity’s normal operating cycle; or assets held
for trading within the next 12 months. The rest are considered noncurrent
assets. From our adjusted trial balance, our current assets include cash,
accounts receivables and prepaid expenses. Take note that we have grouped
the prepaid rent (P15,000), prepaid insurance (P11,000) and unused
computer supplies (P45,000) into one account, that is, prepaid expenses
totaling P 71,000. On the other hand, our noncurrent assets only consist of
computer equipment and its accumulated depreciation. This results to a net
carrying amount of P98,333 for the computer equipment.

3. Present your liabilities. After we’re done with the total assets, next are the
liabilities. Liabilities should also be classified as current and noncurrent. But in
our example, we only have current liabilities. Our current liabilities include
accrued expenses, loans, and income tax payable. After presenting our total
assets and liabilities, our balance sheet already looks like this.
4. Add the owner’s equity. The balance sheet is an equation of “Assets =
liabilities + equity”. Thus, we need to add the owner’s equity in the “liabilities
and equity” section of our balance sheet. The owner’s equity presented may
only show the ending balance, that is, the ending balance amount shown in
the statement of changes in owner’s equity. This amount is already the result
after adjusting the investments, withdrawals, net income (loss) for the year,
and other adjustments from the beginning balance of the owner’s equity. After,
presenting the owner’s equity, our balance sheet will already look like this.
Note that the “total assets” and the “total liabilities and owner’s equity” must
be balanced. Also remember that this is only an example of a balance sheet
for a single proprietorship business. Other forms of businesses, such as
partnership and corporation, may have different presentation in the equity
section of the balance sheet. Furthermore, the term balance sheet is
amended to statement of financial position by IAS 1 (International Accounting
Standard) in 2007. Hence, if your country is covered by this standard, the
statement of financial position is a more appropriate term than the balance
sheet. But for the purpose of this example, we have used the term balance
sheet, since it is the most common and most searched term on the Internet.
Also remember that in a complete set of financial statements, accounts in the
balance sheet are also cross-referenced to the accompanying notes to
financial statements. This article is only a quick guide to preparing a simple
balance sheet for an individual or a single proprietorship business.

How to Make a Statement of Changes in

Owner’s Equity
MARCH 13, 2012 BY VICTORINO ABRUGAR LEAVE A COMMENT

4 Share

Tweet

2 Share

4 Share

0 Pin

0 Share

The statement of changes in owner’s equity is a separate component of

financial statements for a sole or single proprietorship business. It presents
how the capital shown in the balance sheet equity section changes over a
period of time. It also shows the effects on the capital account of the various
business transactions that occurred during that period. This statement
normally presents first the owner’s beginning capital balance. Then, it
summarizes the net increase or changes in the owner’s equity by presenting
the additional investments during the period plus net income (loss) for the
period, and subtracted by the owner’s withdrawals during that period. The net
changes in owner’s equity is then added to the beginning capital balance to
arrive at the ending capital balance, which is also what is forwarded and
presented in the balance sheet. Other forms of businesses, such as
partnership and stock corporations have different presentations of statement
in changes in equity. In this post, we will discuss how to make a statement of
changes in owner’s equity from the adjusted trial balance and income
statement we have shown in our previous articles.

Here is the adjusted trial balance we have prepared in our previous

discussions.
How to prepare a statement of changes in
owner’s equity
For individual or sole proprietorship business, the preparation of statement of
changes in owner’s equity is quite easy, especially if you have already
adjusted your trial balance and have already prepared an income statement.
All you need to do are the following:

1. Put a heading. The heading includes the name of the entity (individual or
company), name of the financial statement (statement of changes in owner’s
equity), and the reporting period, that is, for the year ended December 31,
2011 (the same with an income statement). Other complex forms of
businesses may include additional information in the heading, such as when
reporting a consolidated statements of changes in equity or when presenting
comparative reporting periods. You may also indicate the currency (e.g.,
Amounts in Philippine Pesos) where the statement is based.

2. Present first the capital beginning. Since our example entity just started
business on December 2011, our capital beginning balance is NIL.

3. Compute and present the net increase in owner’s equity. The net
increase in owner’s equity equals the investments during the year plus net
income during the year, less the owner’s withdrawals during that period. In our
trial balance, the balance of capital is P300,000. Since, we don’t have a
beginning balance in our capital, we can judge that this amount represents all
the entity’s investment infused during the year. We can also trace this amount
to the general ledger and general journal to make sure that the amount truly
represents investments during the year.

The net income shown in the statement of owner’s equity is simply the net
income in our income statement, which amounts to P51,414. The sum of the
investments and net income during the year is subtracted by the owner’s
withdrawals during that period. As shown in our trial balance sample, the
owner’s drawings during the year amounted to P25,000. Accordingly, the net
increase in owner’s equity for the year equals to P326,414 (P351,414 –
25,000).

4. Compute the ending balance of the owner’s capital. The last

computation is the capital balance as of December 31 or the ending balance.
It is simply computed by adding the net increase (decrease) to the beginning
balance of capital. In our example, M. Santos, capital at the end of period
amounted to P326,414. This is also the amount that we should carry forward
to the capital balance in the equity section of the balance sheet.

This is how our statement of changes in owner’s equity looks like:

This statement of owner’s equity is only from a simple sole proprietorship

business. Partnerships, stock corporations, and non-for-profit organizations
have different and more complex presentations of statements of changes in
equity. Take note that the term “owner’s equity” we used means there is only
singular owner of that equity. Furthermore, in a complete set of financial
statements, where notes to financial statements are prepared, the material
accounts shown in the statement of equity are cross-referenced to the
accompanying notes to financial statements.

How to Compute Your Business Profit

OCTOBER 18, 2012 BY FRITZ NATIVIDAD LEAVE A COMMENT

22 Share

Tweet

0 Share

0 Share

0 Pin

0 Share

What is a business profit? Business

profit refers to the excess of the business’ total income less all expenses
within the accounting period, which may be presented monthly, quarterly or
annually. However, please be informed that a loss, instead of a profit, will be
the result if the total expenses exceed the total income of the business. For all
business owners, profits are important in order for their business to survive. In
the first place, unless you’re in to charity, do you know anyone who wants to
conduct business without making profits?

As business owner, you must have a good understanding of your business’

financial statements. If you’re not, you may need a professional help from
people whom you can get a good accounting and financial advice – they are
generally referred to as Accountants. They can review your financial
statements and can also provide valuable advice on how to improve your
accounting records.

So how do you compute your business profit? The simplest formula is:

Total Income – Total Expenses = Net Profit

• Total income generally includes revenues or sales of goods or services to

customers. It may also include income from deposits, investments and any
other revenue sources such as interest, royalties, dividends, and gains on
exchange of properties.

• Total expenses includes all costs or expenses related to the sale

transactions such as production costs, marketing and all other cost and
expenses related to your business operations including depreciation, losses,
taxes, and interest on debt.

In simple term, profits are all the incomes you earned from your business less
all the expenses you’ve incurred to run the business.
Take note the difference between income, revenue, and gain. You may also
read our post about the difference between cost and expense.

In addition, for presentation purposes, I would like to emphasize three

presentations on how to calculate profit based on the three types of business.
In general, there are three common types of businesses based on their
operation in the market, namely, service business, merchandising business,
and manufacturing business.

Computation of profit on service businesses

Service firms are businesses that provide services instead of product to its
customers. Computation for its profit is simpler because it is known that
service type business does not carry inventory, thus, it does not have a
computation for cost of goods sold. The following is a sample outline for the
computation of the profit of a service business.

*Other operating expenses can be further classified as general and

administrative expenses. They are the expenses incurred by the business
during the accounting period which are not directly related to the service
income earned, such as income taxes.

Computation of profit on merchandising businesses

Merchandising businesses are businesses that enter into retail and trading of
its products. One characteristic of this type of business operation is that they
don’t produce or manufacture their own products to sell. Instead, they
purchase its products from other business and then sell it to customers with a
mark-up from its purchase price. As such, it will be observed that the
computation of its profit involves calculation for its cost of goods sold but do
not compute for the cost of goods manufactured. Below is a sample
computation of net profit or net income of a merchandising business.

• Beginning Inventory – inventories you have in your business at the beginning

of the period that are available for sale.
• Purchases – inventories you bought during the current period.
• Direct costs – costs incurred that can be directly identified or attributed to the
merchandising of the product such as freight-in and inventory storage costs.
• Ending Inventory – inventories you have in your business at the end of the
period that has not yet been sold to customers.

Computation of profit on a manufacturing business

Manufacturing businesses are those that produce or make their own products
then sell it to their customers. The computation of their profit is the same with
merchandising type of business operation. However, the cost of goods sold
section for a manufacturing business is more complicated. The major
difference here is obviously in the need to know how to compute cost of goods
manufactured. Furthermore, the manufacturing type of business operation’s
inventory that is sold is called finished goods rather than being called simply
an inventory and cost of goods manufactured has replaced inventory
purchases. The following is the format of computing the net profit or net
income of a manufacturing business:

Whenever you manufacture your own product, additional elements are

entered into the cost. You’ll have material costs, direct labor, and some
overhead costs to convert raw materials to finished goods. A manufacturing
company has three inventories namely raw materials, work in process
inventory, and finished goods inventory.

• Raw materials consist of all the materials you bought to make your products.
• Work in process is all your products that you are in the middle of making at
the end of the period.
• Finished goods inventory is the value of all completed products that are not
yet sold to customers

Now that you have an idea how to compute your business profit, my next
question is which type of business operations your business falls under?

What is the Difference between Income,

Revenue, and Gain?
OCTOBER 17, 2012 BY VICTORINO ABRUGAR LEAVE A COMMENT

17 Share

Tweet

1 Share

3 Share

0 Pin

0 Share

What is the difference between income, revenue, and gain? These accounting terms are usually
presented and seen in the income statement. They may have similarities, but they are actually
different from each other. Financial statements preparers, accountants, and other accounting
professionals should learn how to distinguish the three to better reflect and present these
elements in the financial statements. Furthermore, business owners, entrepreneurs, investors,
managers and other business people should also learn how to distinguish those three to make
better financial and economic judgments.
Their definitions
To understand the differences among income, revenue, and gain, we go to their definitions as
defined by the IASB (International Accounting Standards Board) in the IFRS (International
Financial Reporting Standards) Framework and IAS (International Accounting Standards).

Income – represents increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity participants. [F 4.25(a)].

Revenue – represents the gross inflow of economic benefits (cash, receivables, other assets)
arising from the ordinary operating activities of an entity (such as sales of goods, sales of
services, interest, royalties, and dividends). [IAS 18.7]

Gains – represent other items that meet the definition of income and may, or may not, arise in
the course of the ordinary activities of an entity. Gains represent increases in economic benefits
and as such are no different in nature from revenue. Hence, they are not regarded as constituting
a separate element in the IFRS Framework. [F 4.29 and F 4.30]

Based on the definitions above, we can say that income covers both revenue and gains. This
means that both revenues and gains can be considered as income or part of the income. In other
words, income is a generic term, which can be a revenue, a gain, or both.

Between revenue and gain, the difference is that revenue always arises in the course of the
business’ ordinary activities (e.g., sales of goods or sales of services), while gain represents other
items that are considered as income which may or may not arise in the ordinary activities of the
business or entity (e.g., gain from sale of an old property or gain from the sale of investments).

Further illustration
Did you already understand the difference between income and revenue from the explanations
above? How about the difference between revenues and gains? To further illustrate their
differences, let us say that you are into the business of selling computers and you have provided
the following within the year or the accounting period:

Sales of computers = $200,000

Costs of computers sold = $120,000
Income from operations = $80,000
Tax and other expenses = $40,000
Gain from sale of company’s service vehicle = $10,000
Net income = $50,000

In the examples above, the “total income” equals $210,000 which is composed of the revenue
and gains. Revenue or Sale of computers ($200,000) + Gain from sale of service vehicle
($10,000) = $210,000

Income can be expressed as income from operations or gross income…

Sales of computers ($200,000) – Costs of computers sold ($120,000) = $80,000

Income can also be expressed as net income ($50,000) or the excess of total income over the
total expenses. Take note that when total expenses exceed total income, the difference is called
net loss.

Revenue is simply the gross sales from the sales of computers amounting to $200,000.
Remember that the ordinary course of business in our example is selling computers. In this case,
the company’s inventories consist of computers.

Gain, which is also part of the total income, amounts to $10,000 – the gain from selling the
company’s service vehicle. We have assumed that the $10,000 is the excess of the property’s
selling price over its net carrying or net book value. Take note that the sale of the company’s
vehicle doesn’t constitute ordinary business operation or transaction because the company is on
the business of selling computers, and not vehicles.

Conclusion
Accounting has the sense of an art and is conventional. It can evolve or it can be further amended
and improved by an authoritative body – for example the IASB. And in the case of clarifying the
meanings and differences of accounting terms, we have to go to the fundamental framework or to
the accepted accounting standards. Though accounting can be considered as an art, we don’t
interpret its terms on our own, but we interpret them based on generally accepted principles.

I hope you have learned something on this discussion.

The Difference between Sales invoice and
Official Receipt
JUNE 18, 2013 BY VICTORINO ABRUGAR 4 COMMENTS

27 Share

Tweet

0 Share

2 Share

0 Pin

0 Share

What’s the difference between a Sales Invoice and an Official Receipt? To

address this question, the following are some of the differences of sales invoices and official
receipts:

Sales Invoice Official Receipt

1. A sales invoice is a document requesting a 1. An official receipt is a document showing the

payment on the sale made by a seller to a payment received by the seller from the buyer on
buyer. the sale made by the seller to such buyer.

2. For a seller, a sales invoice is an evidence 2. For a seller, an official receipt is an evidence of
of sale (transfer of goods or services) and the receipt of payment of sale from a buyer and
accounts receivable from a buyer. should be used to debit (increase) cash and credit
(decrease) accounts receivable from such buyer.

3. For a buyer, a sales invoice is an evidence 3. For a buyer, an official receipt is an evidence of
of purchase and accounts payable to the payment of goods or services purchased from the
seller. seller.

4. Sales invoices are used when you sell 4. Official receipts are used when you’ve already
merchandise or goods but payment is not yet received the payment from customers on the
received from customers. merchandise or goods you’ve sold to them.

5. Sellers of goods and merchandise are 5. Professionals or sellers of services, like

usually required by the BIR to use sales accountants, lawyers and doctors, are usually
invoices or both sales invoices and official required by the BIR to use official receipts.
receipts.

6. Sales invoices can be the basis for 6. Official receipts can be the basis for recording
recording income and VAT sales for taxpayers income and VAT sales for taxpayers using cash
using accrual method of accounting. basis of accounting.

7. According to the BIR, a VAT registered 7. According to the BIR, a VAT registered person
person shall issue a VAT invoice for every shall issue a VAT official receipt for every lease of
sale, barter or exchange of goods or goods or properties and for every sale, barter or
properties. exchange of services.