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 AccountingEmerged 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 ExpensesDirect 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

13776946WDV 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 65673Closing 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 taxationNet Profit as per P/L account before tax 6801169Add: Depreciation as per books 2989788 Donation (add other disallowances here) 4575Loss on sale of FA 0  9795532Less: Depreciation as per Income Tax Act 3,267,999  6,527,533Less: Deduction u/s. 80G 2288Taxable Income 6,525,245Tax Payable @ 30.9% 2016301Round 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.30

0000

of

Book

profi

t or

loss –

high

er of

Rs. 1

5000

0 or

90% of

book

pro

fitOn balance Book Profit – 60% of balance Book Profit

Loss/Profit up to 166666 = 150000166666<Profit =<300000=90% of profitProfit>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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