Method of accounting governs business income computation, inventory and sales valuation adjustments, and timing of interest recognition.

The provision mandates that income from business and residuary sources be computed using the taxpayer's regularly employed cash or mercantile accounting method, subject to notified accounting standards. Purchase and inventory valuation and sale values must follow that method and be adjusted to include any tax, duty, cess or fee actually paid or leviable. Interest on bad or doubtful debts of financial institutions is recognised when credited to profit and loss or received, whichever is earlier; interest on compensation is recognised when received. Definitions address inclusion of payments and prescribed criteria for bad or doubtful debts.

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