(A Philippine legal and tax-practice article for businesses and professionals using the Optional Standard Deduction)

1) Why this topic matters

In the Philippines, choosing the Optional Standard Deduction (OSD) affects how you compute taxable income, but it does not remove your obligation to keep books, record transactions properly, and maintain source documents. Many tax issues arise because taxpayers mistakenly treat OSD as a “no-books / no-records” option.

This article explains what OSD is, who can use it, how the election works, and—most importantly—what the law and tax administration rules imply about journal entries, bookkeeping, and recordkeeping for OSD taxpayers.

2) Legal foundation: OSD and bookkeeping duties (Philippine context)

2.1 Optional Standard Deduction (OSD) under the Tax Code

The OSD is a fixed-percentage deduction allowed in lieu of itemized deductions for income tax purposes. Instead of deducting actual operating expenses supported by receipts, a taxpayer using OSD claims a standard deduction base (depending on taxpayer type), then pays income tax on the resulting taxable income.

Key idea: OSD is a tax computation mechanism, not an accounting method.

2.2 Bookkeeping and books of accounts are separate obligations

Even if you use OSD, you remain subject to the Tax Code provisions on:

Keeping of books of accounts and records (general and/or simplified)
Issuance of invoices/official receipts and maintenance of sales records
Withholding tax and VAT/percentage tax compliance, where proper records are critical

OSD does not replace:

bookkeeping rules for tax administration,
documentation rules for VAT/withholding and other taxes,
requirements to present records during a BIR audit or verification.

3) Who may avail of OSD (and who should be careful)

3.1 Typical taxpayers who may use OSD

Depending on the Tax Code and implementing rules, OSD is commonly available to:

Individuals engaged in trade/business or practice of profession (including mixed-income, subject to limitations and the regime chosen)
Domestic corporations and resident foreign corporations (subject to the rules governing eligibility and election)
General professional partnerships (GPPs) are generally treated as pass-through for income tax, but bookkeeping/records are still required for reporting and partner allocations (OSD is typically a partner-level decision for individuals, not a “tax paid by the GPP” concept)

3.2 Tax regimes that may affect OSD use (practical caution)

OSD usually applies when you are under the regular income tax regime (graduated rates for individuals; corporate income tax for corporations). If you are under other special regimes or preferential rates, or if you opt into simplified income tax options (where applicable), the availability and usefulness of OSD can change.

Because the Philippines has evolving tax regimes and thresholds, always align your OSD decision with your registration status (e.g., VAT vs non-VAT, income tax type, and whether you elected a simplified income tax option).

4) Electing OSD: compliance steps that affect accounting/tax workpapers

4.1 The “election” concept

OSD is not automatic—you generally must signify in the relevant income tax return that you are choosing OSD for the taxable year. In many practical cases:

The choice is made on the annual return (and may be tied to earlier filings depending on taxpayer type and rules).
The choice is typically irrevocable for that taxable year once properly elected (with limited exceptions, if any, under specific implementing rules).

4.2 Consequence for bookkeeping

Electing OSD does not mean you stop recording expenses. It means:

For income tax deduction computation, you will not deduct actual expenses (itemized) as a reduction from gross income in determining taxable income (you claim OSD instead).
For book accounting, you still record actual expenses because:
- your financial statements must reflect actual operations,
- VAT/withholding and other tax computations rely on actual transactions,
- audit trails and BIR verification require proper records.

5) The core point: What are the “journal entry requirements” for OSD taxpayers?

5.1 OSD does not create a special “OSD journal entry”

A frequent misconception is that a taxpayer must record an “OSD expense” in the general journal. In proper accounting practice, you generally do not post OSD as an operating expense. OSD is a tax-only deduction used to compute taxable income; it is usually reflected in:

the income tax computation schedule, and
the income tax provision (income tax expense / payable) based on taxable income after OSD.

In other words:

Books record actual revenues and actual expenses.
Tax return computes taxable income using OSD instead of itemized deductions.
Any difference between accounting income and taxable income is handled through tax reconciliation/workpapers (and, for financial reporting, through current/deferred tax concepts as applicable).

5.2 Your required journals/books depend on your registration and size

OSD taxpayers must keep books required under Philippine tax rules for their classification, typically falling into one of these categories:

A) Manual books (bound) registered with the BIR Common minimum set for many taxpayers:

General Journal
General Ledger And depending on business type/need:
Cash Receipts Journal
Cash Disbursements Journal
Sales Journal / Purchases Journal (or equivalents)

B) Loose-leaf books Allowed subject to permitting/registration requirements and periodic submission rules.

C) Computerized Accounting System (CAS) / Computerized Books Allowed subject to BIR permitting, system rules, and audit trail requirements.

D) Simplified books (for qualified small taxpayers) Certain non-VAT or small taxpayers may be allowed simplified bookkeeping (e.g., a simplified journal/ledger or their equivalents), but simplified does not mean “no books.”

5.3 Minimum content expectations for journal entries (audit-proofing)

Regardless of OSD, journal entries should be:

Complete: date, reference/invoice or OR number, payee/customer, description, accounts, debit/credit amounts
Sequential and traceable: clear link to source documents and subsidiary schedules
Consistent: same policy for revenue recognition and expense classification
Supported: invoices, official receipts, withholding tax forms, import docs, contracts, bank records, etc.

5.4 Source document discipline still matters under OSD

Even though OSD removes the need to claim itemized expense deductions for income tax, you still need documents because:

VAT input tax claims require valid VAT invoices/receipts and substantiation.
Withholding taxes must be proven (BIR forms, alphalists, certificates).
Gross sales/receipts and gross income must be verifiable.
BIR can still assess you for deficiencies in VAT/percentage tax/withholding even if income tax deductions are not itemized.

6) Practical journal entries: What OSD taxpayers still record

Below are typical entries an OSD taxpayer should still book the same way as any other taxpayer:

6.1 Revenue recognition (sales/services)

On sale/service billed (credit sale):

Dr Accounts Receivable
Cr Sales / Service Revenue
(If VAT-registered) Cr Output VAT

On cash collection:

Dr Cash / Bank
Cr Accounts Receivable

6.2 Purchases and expenses

Inventory purchase (if applicable):

Dr Inventory (or Purchases, depending on system)
Dr Input VAT (if VAT-registered and creditable)
Cr Accounts Payable / Cash

Operating expenses (rent, utilities, salaries, etc.):

Dr Expense account (Rent Expense, Utilities, Salaries, etc.)
Dr Input VAT (if applicable and creditable)
Cr Cash/Bank or Accounts Payable

Even under OSD, you still record these because they are real transactions affecting cash, payables, and financial statements.

6.3 Withholding tax (expanded/compensation) mechanics

If you are required to withhold on certain payments:

At time of payment to supplier subject to withholding:

Dr Expense / Asset (net-of withholding is not the entry; record full expense)
Cr Cash/Bank (net amount paid)
Cr Withholding Tax Payable (amount withheld)

Upon remittance to BIR:

Dr Withholding Tax Payable
Cr Cash/Bank

OSD does not change withholding duties.

6.4 VAT/percentage tax

If VAT-registered:

You still track Output VAT and Input VAT through journals/subsidiary ledgers.
OSD does not remove VAT compliance.

If non-VAT and subject to percentage tax (if applicable under your registration and regime):

You still track gross receipts and compute percentage tax based on the rules governing your registration.

7) Where OSD shows up: income tax provision entries (the part people confuse)

7.1 OSD is reflected in tax computation, not operating expense

At year-end (or quarter-end if you recognize current tax periodically), the journal entry typically reflects the income tax due:

Dr Income Tax Expense (current)
Cr Income Tax Payable

The amount is based on taxable income after applying OSD (and other tax adjustments, if any).

7.2 Tax reconciliation (workpapers)

OSD taxpayers should maintain a reconciliation file showing:

Accounting profit (per books/FS)
Add: non-deductible items (if applicable for tax)
Less: OSD (standard deduction in lieu of itemized)
Other statutory adjustments
Taxable income and tax due

This reconciliation is often the most important “bridge” document in an audit.

8) Substantiation: What you don’t need for income tax, and what you still must keep

8.1 Income tax deductions

Under OSD, you generally do not need to substantiate itemized deductible expenses for the purpose of claiming them as deductions because you are not claiming them.

8.2 What you still must substantiate anyway

You still need support for:

Gross sales/receipts (invoices/ORs, contracts, schedules)
Cost of sales/cost of services (especially relevant because errors here can inflate or understate gross income; and in some contexts cost may be treated differently from “deductions”)
VAT input claims
Withholding tax compliance
Payroll and statutory contributions (for labor compliance and withholding)
Related party transactions and other high-risk items

In practice, BIR audits often examine revenue completeness and indirect tax compliance even when OSD is used.

9) Registration and administrative rules that affect journals

9.1 Registration of books and authority to print

OSD taxpayers must still:

register books (manual/loose-leaf/CAS as applicable),
maintain proper invoicing/receipting,
comply with invoicing rules and retention periods.

9.2 CAS/loose-leaf considerations

If you use accounting software:

Ensure your system has audit trails, controlled sequence numbering, and supports BIR-required reports.
Ensure you have the required permits/acknowledgments for computerized books or system.

10) Common pitfalls (OSD-specific)

“OSD means no bookkeeping.” False. You still must keep books and records.
Recording “OSD expense” monthly. Generally incorrect; OSD is a tax computation line, not an operating expense account.
Weak sales/receipts support. OSD does not protect you from assessments due to unreported revenues.
Ignoring withholding tax duties. These are independent obligations.
VAT input claims without valid documents. OSD does not relax VAT substantiation rules.
No reconciliation schedule. In an audit, inability to explain taxable income computation invites assessments.

11) Best-practice compliance checklist (for OSD taxpayers)

Keep properly registered books (manual/loose-leaf/CAS as applicable).
Record all actual revenues and expenses in journals/ledgers.
Maintain a clean sales/receipts file (invoices/ORs, customer list, schedules).
Keep VAT and withholding folders (returns, alphalists, certificates, proof of remittance).
Prepare an OSD tax computation and reconciliation every filing period (or at least quarterly/annually).
Ensure year-end tax entry reflects tax payable computed after OSD.
Retain documents for the required period and keep them audit-ready.

12) Bottom line

For Philippine taxpayers using OSD, the “journal entry requirements” are essentially the standard bookkeeping and tax compliance requirements—because OSD changes how you compute deductions for income tax, not how you record business transactions.

The correct approach:

Record actual transactions in the books;
Use OSD only in the tax computation and tax provision;
Maintain complete records for revenue, VAT/percentage tax, and withholding obligations.

If you want, tell me whether you’re an individual/professional, corporation, and whether you’re VAT or non-VAT, and I can provide a tailored “minimum books + sample chart of accounts + filing-to-journal workflow” aligned to that profile.