1. Finalisation of Accounts Workshop for Accountants ICAI Bhawan, Vadodara – 8 th July, 2014 ********************************************* CA. Kejal V. Pandya Partner Contractor, Nayak & Kishnadwala Chartered Accountants

2. 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

3. 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)

4. Purchase / Sales Verify with VAT/CST returns the amounts of purchase and sales Purchase 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

5. Direct Expenses Wages Freight Inward Factory Electricity Indirect Expenses Salary Freight Outward Office Electricity

6. Inventory Follow FIFO method to find value of inventory Maintain quantity records A summary should be prepared with rate and quantity with vendor name and invoice no.

7. Routine Accounting Vs. Finalisation of Accounts Routine Accounting Day to day entries No cross references with other related transactions Maintenance of supporting documents Finalisation of Accounts Normally at year end Cross verification of related transactions Reconciliation with supporting documents Compliance with legal provisions Disclosure requirements under AS / Laws

8. Recurring / Regular Expenses Recurring Expenses Rent Electricity Telephone / Mobile Internet Salary / Wages Regular Expenses Insurance Professional Tax Municipal Tax License Fee Membership Fee

9. Comparative Analysis… Analyse transactions within same year Last few years’ comparison Ratio Analysis Reasons for deviation to be recorded and maintained for future reference

10. …Comparative Analysis Gross Profit Ratio = Gross Profit/ Turnover*100 Gross Profit Ratio = Gross Profit/ Turnover*100 Net Profit Ratio = Net Profit/ Turnover*100 Net Profit Ratio = Net Profit/ Turnover*100 Current Ratio = Current Assets/Current Liabilities Current Ratio = Current Assets/Current Liabilities Liquid Ratio = Current Assets - Inventory/Current Liabilities Liquid Ratio = Current Assets - Inventory/Current Liabilities Inventory Turnover Ratio = COGS / Average Inventory Inventory Turnover Ratio = COGS / Average Inventory Operating Ratio = COGS +Operating Exps / Net Sales Operating Ratio = COGS +Operating Exps / Net Sales Debtors Turnover Ratio =Net Credit sales / Average Debtors Debtors Turnover Ratio =Net Credit sales / Average Debtors Ratio Analysis Creditors Turnover Ratio =Net Credit purchases / Average Creditors Creditors Turnover Ratio =Net Credit purchases / Average Creditors

11. 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

12. Statutory payments VAT/CST  VAT/CST Payable  2% reduction  VAT Credit Excise  Excise Payable  Excise paid by cheque / cash  CENVAT availed / utilised Provident Fund Entertainment Tax Reconciliation with relevant returns per periodicity

13. Depreciation calculation… As per old Companies Act, 1956  Schedule XIV  deals 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 old Companies Act, 1956  Schedule XIV  deals 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 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

14. …Depreciation calculation… As per income tax Act, 1961 As per Companies Act, 1956 / 2013 Purchase of asset up to /after 30 th 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

15. …Depreciation calculation – Profit on sale of assets Accum Deprn A/c Dr 20,000 To Gross Block 20,000 Cash/Bank A/c Dr 90,000 To Gross Block 90,000 Gross Block A/c Dr 10,000 To 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 10,000 To Profit on sale of asset 10,000 Entries for Non-corporates

16. Foreign Exchange Gain/Loss On conclusion of transaction For 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

17. Analysis of debtors and creditors Analyse Debtors and creditors per transaction Write off amount not receivable / payable Confirm closing balance bill wise Obtain balance confirmation at least for top debtors / creditors

18. 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 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  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

19. …Deferred tax Calculation - Example Based 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 land26250 13776946 WDV as per IT Act 13436226 Diff in WDV as per IT and books 340720 Deferred tax asset @ 30.9% 105282 Opening Balance39609 To be provided65673 Closing Balance105282 Based On Difference of Depreciation

20. Provision for taxation… Compute taxable income as per Income Tax Act, 1961 Calculate Tax Payable at applicable rate

21. …Provision for taxation Net Profit as per P/L account before tax6801169 Add: Depreciation as per books2989788 Donation (add other disallowances here)4575 Loss on sale of FA0 9795532 Less: Depreciation as per Income Tax Act3,267,999 6,527,533 Less: Deduction u/s. 80G2288 Taxable Income6,525,245 Tax Payable @ 30.9%2016301 Round off2025000

22. 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

23. 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.

24. …Finalisation of Partnership Firms - Remuneration to Partners - On first Rs.300000 of Book profit or loss – higher of Rs. 150000 or 90% of book profit On balance Book Profit – 60% of balance Book Profit Loss/Profit up to 166666 = 150000 166666<Profit =<300000=90% of profit Profit>300000 = 60% of (profit – 300000)+270000 Prescribed Limit

25. …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 disallowed How to calculate???

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