How to Change Your Accounting Method From Cash to Accrual Basis With the BIR

Changing from the cash method to the accrual method of accounting is not something a business can simply decide to do on its own return — it is a change in accounting method that Philippine BIR administrative practice expects a taxpayer to coordinate with its Revenue District Office (RDO), typically through BIR Form 1905, before filing under the new method. That is because taxable income is computed using whichever accounting method the taxpayer regularly keeps its books under, and switching methods shifts exactly when income and expense get recognized — and therefore when they get taxed.

This post covers changing accounting method, not accounting period — those are two different things this site has already covered separately. For the period question (calendar year vs. fiscal year), see Calendar Year vs Fiscal Year: How to Change Your BIR Accounting Period Using Form 1905. For the general-purpose registration update form referenced throughout this post, see BIR Form 1904 vs BIR Form 1905: One-Time Transaction Registration vs Updating Existing Registration.

What does the BIR look at when it decides which accounting method applies? #

NIRC Section 43, under the general rule on methods of accounting, provides that taxable income is computed using the method of accounting the taxpayer regularly uses in keeping its books — unless that method does not clearly reflect the taxpayer’s income, in which case the computation is made under whichever method, in the opinion of the Commissioner of Internal Revenue, does clearly reflect income. In plain terms: the starting point is whatever method the taxpayer already uses consistently, and the BIR’s fallback authority only kicks in if that regular method distorts the picture of income.

• The default is the taxpayer’s own regularly used method, not a method the BIR picks first.
• “Regularly used” implies consistency — the method on a taxpayer’s books across periods, not whichever method is convenient for a particular return.
• The Commissioner’s authority to require a different method is a backstop for when the regular method does not clearly reflect income, not a general license to override any taxpayer’s books.

Cash basis vs. accrual basis: the two methods most taxpayers choose between #

The two primary accounting methods recognized under Philippine tax law are the cash method and the accrual method, and the difference comes down to timing — not whether an amount is taxable, but when it is taxable. Some taxpayers use other recognized methods, such as the percentage-of-completion method for certain long-term construction contracts, but for most businesses the real choice is between cash and accrual.

Neither method is inherently “better” for tax purposes — each one simply recognizes the same economic transaction at a different point in time. The practical consequence is that a transaction that falls right at a period boundary can land in a different taxable year depending on which method applies, which is the whole reason the BIR cares about which method a taxpayer is actually using.

Accounting method vs. accounting period: don’t conflate the two #

A change in accounting method (cash to accrual, or accrual to cash) is a different question from a change in accounting period (calendar year to fiscal year, or back), even though both changes get coordinated with the BIR and both can involve BIR Form 1905. Method is about when within a transaction’s life income or expense is recognized. Period is about which 12-month window a taxpayer’s taxable year covers in the first place.

This site has already covered the period question in detail — see Calendar Year vs Fiscal Year: How to Change Your BIR Accounting Period Using Form 1905, which walks through NIRC Section 46 and RR No. 3-2011, as amended by RR No. 9-2011, the rule that only corporations and partnerships may elect a fiscal year, and the short-period return a period change triggers. That post is about accounting period. This post is about accounting method. A taxpayer that mixes the two up risks filing the wrong request with its RDO or misunderstanding which rule actually governs the change it wants to make.

Why a taxpayer can’t just start filing under a different method #

Unlike the bookkeeping choice a taxpayer makes when it first registers with the BIR, a later change in accounting method is understood under BIR administrative practice to require prior coordination with the taxpayer’s RDO — typically by updating registration information through BIR Form 1905 — because the change can shift when income and expense are recognized, and therefore shift tax liability between taxable periods. At initial registration, a taxpayer simply states the method it will use. Changing that method afterward is a different act: it reaches back into how the taxpayer’s existing books and prior filings line up with its next return.

• A new registrant chooses its method when it first registers — no “change” has happened yet, since there is no prior method on file to change from.
• An established taxpayer that wants to switch methods is altering something already on record with the BIR, which is why coordination with the RDO matters.
• The underlying concern is consistency: the BIR’s examiners expect a taxpayer’s returns to follow the method the taxpayer has been regularly using, and an unannounced switch breaks that expectation.

For the mechanics of updating registration information generally — including which form covers which kind of change — see BIR Form 1904 vs BIR Form 1905: One-Time Transaction Registration vs Updating Existing Registration.

Worked example: switching methods mid-stream without BIR coordination #

The figures and scenario below are illustrative only, built to show the timing mismatch a method change can create — not a real taxpayer or an actual BIR case. Assume a small accounting firm has been filing under the cash method for years. Partway through the year, it crosses the VAT registration threshold, and its external auditor now requires the firm’s financial statements to be prepared on an accrual basis for lending and compliance purposes. The firm’s bookkeeper, following the auditor’s instruction, starts recording revenue as accrual from that point forward — without first raising the change with the firm’s RDO.

Consider a single transaction: the firm renders consulting services and earns a ₱500,000 fee in December 2026, but the client does not pay until January 2027.

If the firm’s 2026 annual return is still prepared and filed on the cash basis the BIR has on record for it, but the bookkeeper’s internal schedules and the auditor’s accrual-basis financial statements already show the ₱500,000 as 2026 revenue, the firm now has two inconsistent pictures of the same transaction — one on its BIR return, another in its own books and audited statements. That kind of mismatch, surfacing later in a BIR audit or a reconciliation between the firm’s books and its filed returns, is exactly the sort of inconsistency that invites a BIR query, independent of whether the firm ultimately owes more or less tax once the dust settles. Coordinating the method change with the RDO before the switch — rather than after an auditor or a bookkeeper has already moved the books — is what keeps the firm’s filed returns and its actual books telling the same story.

Frequently asked questions #

What is the difference between the cash method and the accrual method? #

Under the cash method, income is reported when it is actually or constructively received, and expenses are reported when they are actually paid. Under the accrual method, income is reported when it is earned — when the right to receive it arises — regardless of when the cash comes in, and expenses are reported when they are incurred, regardless of when they are paid.

Can a business just start filing under a different accounting method whenever it wants? #

No. A change in accounting method is treated differently from the bookkeeping choice a taxpayer makes when it first registers. Because switching methods changes when income and expense are recognized, and therefore shifts tax liability between taxable periods, BIR administrative practice expects a taxpayer to coordinate the change with its Revenue District Office — typically through BIR Form 1905 — rather than changing methods on its own from one filing period to the next.

Is changing accounting method the same as changing accounting period? #

No, and the two are often confused. Accounting method (cash vs. accrual) is about when a transaction is recognized as income or expense. Accounting period (calendar year vs. fiscal year) is about which 12-month window a taxpayer’s taxable year covers. Accounting period is governed by NIRC Section 46 and RR No. 3-2011, as amended by RR No. 9-2011, and is a separate topic from the method question this post covers.

What happens if a taxpayer switches methods mid-stream without coordinating with the BIR? #

The taxpayer risks a mismatch between the income or expense it reports and the income or expense the BIR’s examiners expect to see under the method on file for that taxpayer. A transaction that straddles the switch — earned under one method’s timing rule but reported under the other — can appear to disappear from one period and reappear in another, which is exactly the kind of inconsistency that invites a BIR audit query.

Which BIR form is used to tell the BIR about a change in registered information? #

BIR Form 1905, the Application for Registration Information Update/Correction/Cancellation, is the general form used to update registration information on file with the BIR, including changes relevant to how a taxpayer is set up for filing. A taxpayer planning to change its accounting method should raise the change with its Revenue District Office using this form rather than simply filing its next return on the new basis.

Summary #

NIRC Section 43 computes taxable income under the method a taxpayer regularly uses in its books, with the Commissioner able to require a different method only when the regular one fails to clearly reflect income. The cash method recognizes income and expense on receipt or payment; the accrual method recognizes them when earned or incurred — and that timing difference is why a change in method, unlike the choice a new registrant makes, is understood under BIR practice to need coordination with the RDO, typically through BIR Form 1905, before a taxpayer starts filing on the new basis. This is a distinct question from changing accounting period (calendar year vs. fiscal year), covered separately in Calendar Year vs Fiscal Year: How to Change Your BIR Accounting Period Using Form 1905. Switching methods mid-stream without that coordination — as the worked example above shows — risks a mismatch between a taxpayer’s filed returns and its own books, which is the kind of inconsistency that invites a BIR audit query.