The Income Tax Ordinance, 2001 clearly defines the principles of accrual based accounting for income under the head “Business” for the tax year 2025-26. Section 34 of the updated ordinance explains how income and expenses are treated under this system.
According to the rules, a taxpayer following the accrual method records income when it becomes due, even if payment is delayed or made in installments. Similarly, expenses are recognized when the liability arises, provided the amount can be measured with reasonable accuracy.
The law further clarifies that if a deduction is allowed for any expense while calculating business income, but the liability is not settled within three years, the unpaid portion will be taxed in the year following that three-year period. However, if the liability is later discharged, the taxpayer may claim a deduction in the year of payment.
Another important provision relates to trading liabilities. If a person obtains any benefit from such a liability after receiving a deduction, the benefit’s value becomes taxable in the year it is received.
In essence, accrual accounting ensures that income and expenses are matched to the correct period, regardless of actual cash flow. This method strengthens transparency and consistency in tax reporting. The adoption of the accrual principle under Pakistan’s tax laws reflects the global standards of financial reporting while safeguarding revenue collection for the government.
(This article is for informational purposes only and does not constitute legal or tax advice. Readers are advised to consult a qualified tax professional or legal advisor for guidance specific to their individual circumstances.)