FBR outlines cash and accrual accounting rules and explains the tax treatment of unpaid liabilities and changes in accounting methods.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the accounting methods to be used for computing taxable business income for Tax Year 2027.
According to the Income Tax Ordinance, 2001, updated up to June 30, 2026, Section 32 provides that a person’s income chargeable to tax shall be computed according to the method of accounting regularly employed by that person.
Under the law, a company is required to account for income chargeable under the head “Income from Business” on an accrual basis. Other persons may account for such income on either a cash or accrual basis, subject to the provisions of the Ordinance.
The FBR may also prescribe that any class of persons account for business income on either a cash or accrual basis.
Change in accounting method
A taxpayer may apply in writing to change their method of accounting. The Commissioner may approve the application if satisfied that the change is necessary to clearly reflect the person’s taxable business income.
Where the accounting method is changed, the taxpayer must make appropriate adjustments to income, deductions, credits or other affected items to ensure that no item is omitted or taken into account more than once.
Cash-basis accounting
Under Section 33, a person using the cash basis for business income recognises income when it is received and incurs expenditure when it is paid.
Accrual-basis accounting
Under Section 34, a person using the accrual basis recognises income when it becomes due and incurs expenditure when it becomes payable.
An amount becomes due when the taxpayer becomes entitled to receive it, even if payment is postponed or is to be made in instalments.
Similarly, an amount becomes payable when all events determining the liability have occurred and the amount can be determined with reasonable accuracy.
Treatment of unpaid liabilities
The FBR has also specified the tax treatment of unpaid liabilities where a taxpayer has already been allowed a deduction for expenditure.
If the liability, or part of it, remains unpaid for three years from the end of the tax year in which the deduction was allowed, the unpaid amount becomes chargeable to tax under the head “Income from Business” in the first tax year following the expiry of the three-year period.
In addition, where a taxpayer has been allowed a deduction for a trading liability and subsequently derives any benefit in respect of that liability, the value of the benefit is taxable as business income in the tax year in which it is received.
If an unpaid liability has previously been brought to tax under this provision and the taxpayer subsequently pays the liability, or part of it, a deduction for the amount paid is allowed in the tax year in which the payment is made.
These provisions form part of the Income Tax Ordinance, 2001, updated by the FBR up to June 30, 2026, and applicable for Tax Year 2027.