Finalisation of AccountsWorkshop for AccountantsICAI Bhawan, Vadodara – 8th July, 2014
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CA. Kejal V. PandyaPartnerContractor, Nayak & KishnadwalaChartered Accountants
Content History of Accounting Purchase, Sales, Direct Expenses, Inventory Routine Accounting Vs. Finalisation of Accounts Recurring /Regular Expenses Comparative Analysis Statutory payments Depreciation calculation Foreign exchange gain/loss Provision for taxation Deferred tax working Analysis of debtors and creditors Investment Finalisation of Partnership Firms
History of Accounting
Emerged more than 7000 years back in Mesopotamia
Closely related to developments in writing, counting and money
Modern Professional Accounting developed in Scotland in 19th Century
Transformation from Single Entry Accounting to Double Entry Accounting
Two types : Financial Accounting (for external Purpose) and Management Accounting (for Internal purpose)
Purchase / SalesVerify with VAT/CST returns the
amounts of purchase and salesPurchase and sales return should
be accounted in separate accounts
Purchase of raw material only should be shown as part of trading activity.
Other purchases should be part of indirect expenses
Direct Expenses
Direct ExpensesWagesFreight InwardFactory
Electricity
Indirect Expenses
SalaryFreight OutwardOffice Electricity
InventoryFollow FIFO method to find value
of inventoryMaintain quantity recordsA summary should be prepared
with rate and quantity with vendor name and invoice no.
Routine Accounting Vs. Finalisation of AccountsRoutine AccountingDay to day entriesNo cross references
with other related transactions
Maintenance of supporting documents
Finalisation of Accounts
Normally at year endCross verification of
related transactionsReconciliation with
supporting documentsCompliance with legal
provisionsDisclosure
requirements under AS / Laws
Recurring / Regular Expenses
Recurring ExpensesRentElectricityTelephone / Mobile InternetSalary / WagesRegular Expenses InsuranceProfessional TaxMunicipal TaxLicense FeeMembership Fee
Comparative Analysis…Analyse transactions within same
yearLast few years’ comparisonRatio AnalysisReasons for deviation to be
recorded and maintained for future reference
…Comparative Analysis
Gross Profit Ratio = Gross Profit/ Turnover*100
Net Profit Ratio = Net Profit/ Turnover*100
Current Ratio = Current Assets/Current Liabilities
Liquid Ratio = Current Assets - Inventory/Current Liabilities
Inventory Turnover Ratio = COGS / Average Inventory
Operating Ratio= COGS +Operating Exps / Net Sales
Debtors Turnover Ratio=Net Credit sales / Average Debtors
Ratio Analysis
Creditors Turnover Ratio=Net Credit purchases / Average Creditors
Statutory payments…
TDS TDS Payable TDS paid Interest on late payment Late filing fee
Professional Tax Employer Employees
Service Tax ST Payable ST paid by cheque / cash CENVAT availed / utilised
Statutory payments
VAT/CST VAT/CST Payable 2% reduction VAT Credit
Excise Excise Payable Excise paid by cheque / cash CENVAT availed / utilised
Provident FundEntertainment TaxReconciliation with relevant returns per
periodicity
Depreciation calculation…
As per old Companies Act, 1956
Schedule XIVdeals with only
depreciation of tangible assets.
contained rates of depreciation of tangible assets.
100% Depreciation shall be charged on assets whose actual cost does not exceed Rs.5,000/-
Unit of production method of depreciation not permissible
As per New Companies Act, 2013
Schedule XIV deals with the
amortization of intangible assets also.
contains only useful lives of tangible assets and does not prescribe depreciation rates.
Omits the provision for 100% Depreciation on immaterial items i.e, assets whose actual cost does not exceed Rs.5,000/-
Unit of production method of depreciation permitted
…Depreciation calculation…
As per income tax Act, 1961
As per Companies Act, 1956 / 2013
Purchase of asset up
to /after 30th September
Profit/loss on sale of FA
Purchase of asset - pro rata
calculation
Purchase price 100000 Depreciation 20000 WDV 80000 Sale value 90000 Profit 10000
…Depreciation calculation – Profit on sale of assets
Accum Deprn A/c Dr 20,000To Gross Block 20,000Cash/Bank A/c Dr
90,000To Gross Block
90,000Gross Block A/c Dr 10,000To Profit on sale of asset 10,000
Entries for Corporates
Cash/Bank A/c Dr 90,000
To Fixed Asset 90,000
Fixed ASset A/c Dr 10,000To Profit on sale of asset 10,000
Entries for Non-
corporates
Foreign Exchange Gain/Loss
On conclusion of transactionFor incomplete transactions, on
outstanding balance on Balance Sheet date
On balance of foreign currency bank accounts
Discount given/taken not considered as forex gain/loss
Forex Gain/loss working
Analysis of debtors and creditorsAnalyse Debtors and creditors
per transactionWrite off amount not receivable /
payableConfirm closing balance bill wise Obtain balance confirmation at
least for top debtors / creditors
Deferred tax Calculation…
Difference between Depreciation as per as per Companies Act and Income Tax Act
Tax on difference is deferred tax to be provided during the year
Add the same to opening balance to derive closing balance
Difference between WDV of Fixed Assets on Balance Sheet date as per Companies Act and Income Tax Act
Reduce cost of land from WDV as per Companies Act
Tax on difference is closing balance of deferred tax
Difference between opening and closing balance is Deferred Tax Income / Expense
…Deferred tax Calculation - ExampleBased On
Difference of WDV
Depreciation as per books of account
495432
Depreciation as per IT Act
393269
Difference in amount of depreciation
102163
Deferred tax assets @30.9%
31568
Opening balance 212218
Addition 31568
Closing Balance 243786
Net Block as per Books 13803196
Less: Value of land 26250
13776946
WDV as per IT Act 13436226
Diff in WDV as per IT and books
340720
Deferred tax asset @ 30.9% 105282
Opening Balance 39609
To be provided 65673
Closing Balance 105282
Based On Difference of Depreciation
Provision for taxation…
Compute taxable income as per Income Tax Act, 1961
Calculate Tax Payable at applicable rate
…Provision for taxation
Net Profit as per P/L account before tax 6801169
Add: Depreciation as per books 2989788 Donation (add other disallowances here) 4575
Loss on sale of FA 0
9795532Less: Depreciation as per Income Tax Act 3,267,999
6,527,533
Less: Deduction u/s. 80G 2288
Taxable Income 6,525,245
Tax Payable @ 30.9% 2016301
Round off 2025000
Investment
Verify closing balance of investments (specially investments in FDRs etc)
Account for accrued income on the same
Verify TDS deducted if any, on income accrued and account for the same
Obtain fair market value for disclosure requirements
Finalisation of Partnership Firms - Remuneration to Partners…
To be given as prescribed in partnership deed
As per section 40(b) of the IT Act,1961 if remuneration to partners exceeds prescribed limit, excess remuneration will be disallowed.
…Finalisation of Partnership Firms -Remuneration to Partners -
On
first
Rs.3
0000
0 of
Book
pro
fit o
r
loss
– h
ighe
r of
Rs. 1
5000
0 or
90%
of b
ook
profi
tOn balance Book Profit – 60% of balance Book Profit
Loss/Profit up to 166666 = 150000166666<Profit =<300000=90% of profit
Profit>300000 = 60% of (profit – 300000)+270000
Prescribed Limit
…Finalisation of Partnership Firms - Interest on Capital to Partners
At rates applicable as per Income Tax act, 1961 (maximum 12% for AY 2013-14)
Excess rate will be disallowedHow to calculate???
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