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

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

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.

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

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

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

…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

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 Fund Entertainment Tax Reconciliation with relevant returns per periodicity

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

…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 Depreciation WDV Sale value Profit 10000

…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

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

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

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

…Deferred tax Calculation - Example Based On Difference of WDV Depreciation as per books of account Depreciation as per IT Act Difference in amount of depreciation Deferred tax Opening balance Addition Closing Balance Net Block as per Books Less: Value of land WDV as per IT Act Diff in WDV as per IT and books Deferred tax 30.9% Opening Balance39609 To be provided65673 Closing Balance 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 Add: Depreciation as per books Donation (add other disallowances here)4575 Loss on sale of FA Less: Depreciation as per Income Tax Act3,267,999 6,527,533 Less: Deduction u/s. 80G2288 Taxable Income6,525,245 Tax 30.9% Round off

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 of Book profit or loss – higher of Rs or 90% of book profit On balance Book Profit – 60% of balance Book Profit Loss/Profit up to = <Profit =<300000=90% of profit Profit> = 60% of (profit – ) Prescribed Limit

…Finalisation of Partnership Firms - Interest on Capital to Partners At rates applicable as per Income Tax act, 1961 (maximum 12% for AY ) Excess rate will be disallowed How to calculate???

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