Finalisation of Accounts Workshop for Accountants ICAI Bhawan , Vadodara – 8 th July, 2014

1. Finalisation of AccountsWorkshop for AccountantsICAI Bhawan, Vadodara – 8th 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 Closely related to developments in writing, counting and money Emerged more than 7000 years back in Mesopotamia Modern Professional Accounting developed in Scotland in 19th Century Two types : Financial Accounting (for external Purpose) and Management Accounting (for Internal purpose) • Transformation from Single Entry Accounting to Double Entry Accounting

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

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 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 30th September Purchase of asset - pro rata calculation Profit/loss on sale of FA • Purchase price 100000 • Depreciation 20000 • WDV 80000 • Sale value 90000 • Profit 10000

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

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 forexgain/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 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 Depreciation Based On Difference of WDV

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

21. …Provision for taxation

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

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???

26. !!! Thank You !!!!!! never give up !!!