Tax Accounting Rules (Cash Method of Income and Expense Accounting)
FROM THE REDACTION
Chapter XXVIII of the Georgian Tax Code – tax accounting rules determine the principles of income and expense accounting. There are a lot of omissions in this part of the tax legislation, which is very interesting and important for business circles in modern accounting conditions.
Article 199. The principles of income and expense accounting
1. A tax payer is obliged to correctly and timely account for incomes and expenses based on documentarily verified data using the methods envisaged in this chapter and refer it to the accounting period during which they were received and incurred in order to clearly show the income liable to taxation (profit). Either the cash or accrual method is used by a tax payer for accounting for incomes and expenses, according to the method used by him for business accounting.
2. A tax payer is obliged to fully account for all operations related to his activities in order to secure control over their beginning, progress and completion. At the same time, primary accounting documents should fully and clearly show a business transaction’s content, object, sum and the names of the parties participating in the business transaction. Besides, in case of supply of goods for economic activities inside the country (except for the supply carried out in accordance with special VAT invoices that contains the details envisaged by the invoice), it is necessary that the invoice should be issued in accordance with the form and order established by the Georgian Finance Minister, without which goods’ transportation, storage and selling is prohibited.
3. The income (profit) liable to taxation should be determined by means of the method used by a tax payer for business accounting. At the same time, a correction of income (profit) can be made only in accordance with the requirements of this Code. If, according to the deductions envisaged by the Code, the data of a tax payer’s business accounting differs from the limit norms established by the Code, then a person should provide for tax accounting of deductions with the purpose of determination of the object liable to taxation.
4. Taking into account the provisions of this article, for tax purposes a tax payer should carry out accounting using either the cash or accrual method on conditions that he will use only one method during the tax year.
5. If a tax payer carries out accounting using the accrual method, the moment of supply of goods/services will be considered as the moment of income receiving.
6. A natural person has the right of carrying out accounting using the accrual method only according to the income received by means of entrepreneurial activities.
7. In changing of any aspect of the accounting method by a tax payer, the correction of the income (profit) liable to taxation should take place during the year of such change, taking into account that not a single element related to determination of the income (profit) liable to taxation should not be omitted or included twice.
8. If a tax payer receives incomes or incurs expenses in non-monetary form, the moment of income receiving or expense incurring is determined in accordance with the order by means of which the moment of income receiving and expense incurring in money form is determined.
It is everywhere mentioned in Article 199 that tax payers use either the cash or accrual method for incomes and expenses accounting, while in business accounting both the cash and accrual methods are used for incomes and expenses accounting and not one of them as it is envisaged in this law. Presentation of the law in this form is inadmissible since it can mislead a tax payer and he may carry out accounting in a wrong way for there are elements in accounting that are only accounted by means of the cash method (funds) and the elements that are accounted only by means of the accrual method (wear, amortization), that is both methods are used.
Article 200. In accordance with the cash method of income and expense accounting envisaged by this article of the law, a tax payer that uses the cash method of accounting should account for incomes after the moment of their receiving or using and carry out deduction of expenses after cashing (the aforementioned does not concern the fixed assets liable to amortization envisaged by Article 183 of this code).
This article is absolutely incomprehensible and obscure. The law’s treatment of the advance is not seen anywhere. A corresponding advance sum (and not the income) is accounted for at the moment of its receiving. With receiving of the advance a person also acquires the right of using and disposing of it, though, at the same time, its recognition as income is a sheer absurd. It is pointed out at the beginning of this article that “… incomes should be accounted for from the moment of their receiving or using and the acquiring of the disposition right …” There would not be a sheer chaos at this place if there were “at the moment of acquiring” instead of “from the moment of acquiring…”, since it is more understandable for the society.
Article 201. The moment of income receiving by the cash method
1. In accordance with the law, in case of cash payment, the moment of cash receiving is considered as income receiving moment, while in case of cashless settlement – transferring of funds to a tax payer’s settlement account or other account that he can dispose of or from which he has the right to withdraw funds.
2. In case of cancellation or covering of a tax payer’s financial liabilities, in particular, in case of a mutual set-off, the moment of cancellation or covering of these liabilities is considered as income receiving moment.
3. With the purpose of securing of financial liabilities according to a promissory note (or some other debt liability) taken by a tax payer, the moment of handing over of a promissory note (or some other debt liability) to another person, but not later then the nearest possible moment of presentation for cashing, is considered as income receiving moment.
In accordance with the last sub-paragraph of this article, the moment of handing over of a promissory note to another person is considered as the moment of receiving of income out of selling of the promissory note. However, a condition is indicated here – but not later then the nearest possible moment of presentation for cashing. If we consider the aforementioned by a practical example, we shall encounter a lot of alternative moments. For instance:
Let us suppose that a person supplied 20 000 GEL worth of goods to Y on April 2, 2005. In exchange for these goods he received a promissory note from Y, in accordance with which Y assumed an obligation to pay 20 000 GEL to X on October 2, 2005 as well as 1,5% of this sum monthly, that is 21 800 GEL by the specified date.
Instance I
On April 2, 2005 X sold this promissory note to Z for 21 500 GEL. In this case X registers the income of 21 500 GEL on August 2, 2005 and, thus, the terms of this article will be satisfied.
Instance II
Y cashed the promissory note within the specified period. In this case, X registers the income of 21 800 GEL on October 2, 2005 and, thus, the terms of this article will be satisfied again.
Instance III
Y did not/could not cash the promissory note within the specified period, because of which X sold it to Y for 22 100 GEL on November 2, 2005. In this case it becomes unclear how should he satisfy the terms of this Article , since there arise three alternative issues:
1. When should the 22 100 GEL received by X be registered – on October 2 (the nearest possible moment of presentation for cashing) or on November 2 (the moment of selling)? – in accordance with this article, on October 2; then:
2. Which sum does X have to register on October 5 – 21 800 or 22 100 GEL? – He could not have received 22 100 GEL on October 5, so he has to register 21 800 GEL; then
3. When does he have to register 22 100 GEL, or, maybe, he does not have to register it at all?
Article 202. The moment of expense incurring by the cash method
1. In accordance with Article 202 of this law, in using the cash method of accounting, the moment of actual incurring of expenses by a tax payer is considered as the moment of incurring of expenses, except for the cases envisaged by Part 3 of this article.
2. In case of cash payment, the moment of cash payment is considered as the moment of incurring of expenses by a tax payer, while in case of cashless settlement – the moment of withdrawal by a bank of sums from a tax payer’s bank or other account.
3. In case of cancellation or covering of financial liabilities to a tax payer, in particular, in case of a mutual set-off, the moment of cancellation or covering of these liabilities is considered as the moment of incurring of expenses.
4. In relation to a debt liability or payments relevant to letting, if the debt liability or the term of the tenancy contract contains several accounting periods, the sum of actually paid interest (rental) which is deducted during the tax year represents the sum of the interest (rental) which is calculated taking into account the accrued or liable to accrual sum during each accounting period.
It is absolutely unclear why in Subparagraph 4 of this article the sum calculated in accordance with the accrued or liable to accrual sum during each accounting period is mentioned as actually paid rental or interest sum. Usually, “the actually paid sum” means the sum the fact of payment of which has taken place. All the more, the talk is of the cash method of accounting. It turns out that if in May 2005 X was to pay the rental in the amount of 300 GEL and paid 600 GEL (June rental as well), only 300 GEL will be considered as the expense incurred by him. It turns out that there is no difference between the cash and accrual method, which in no way means protection of an entrepreneur/consumer.