Karachi, September 13, 2025 – The Federal Board of Revenue (FBR), through the updated Income Tax Ordinance, 2001, has provided a detailed explanation of the method of accounting that taxpayers must follow for the tax year 2025-26.
This update ensures clarity on how different categories of taxpayers should compute their taxable income.
According to Section 32 of the Ordinance, a person’s taxable income is to be calculated in line with the method of accounting that they consistently use. For companies, the rule is stricter: they are required to adopt the accrual basis of accounting for business income, meaning that income and expenses must be recorded when they are earned or incurred, regardless of actual cash movement.
Other taxpayers, however, have some flexibility. Individuals or non-corporate entities can choose between cash or accrual methods, depending on what better reflects their business activities. Still, the FBR holds the authority to prescribe specific rules, requiring certain classes of taxpayers to adopt either cash or accrual accounting, ensuring uniformity across sectors where necessary.
If a taxpayer wishes to change their method of accounting, they must apply in writing to the Commissioner. Approval will only be granted if the change is justified as necessary for an accurate reflection of taxable income. Importantly, when a method is changed, adjustments must be made to prevent double-counting or omission of income, deductions, or credits.
Through these provisions, the FBR emphasizes consistency, transparency, and fairness in financial reporting, ensuring that the chosen method of accounting provides a true picture of a taxpayer’s obligations.
Disclaimer: This article is for informational purposes only. It summarizes provisions of the Income Tax Ordinance, 2001, regarding the method of accounting for tax purposes. It should not be considered legal or tax advice. For personalized guidance, consult a qualified tax advisor.