Finalisation of Accounts
Workshop for Accountants
ICAI Bhawan, Vadodara – 8th July, 2014
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CA. Kejal V. Pandya
Partner
Contractor, Nayak & Kishnadwala
Chartered Accountants
Content
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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
Modern
Professional
Accounting
developed in
Scotland in 19th
Century
Closely related to
developments in
writing, counting
and money
Two types :
Financial Accounting
(for external Purpose)
Transformation
and Management
from Single
Accounting (for Internal
Entry
purpose)
Accounting to
Double Entry
Accounting
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
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Direct 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.
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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
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…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
Liquid Ratio
= Current Assets Inventory/Current Liabilities
Current Ratio
= Current Assets/Current
Liabilities
Statutory payments…
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TDS
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TDS Payable
TDS paid
Interest on late payment
Late filing fee
Professional Tax
 Employer
 Employees
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Service Tax
 ST Payable
 ST paid by cheque / cash
 CENVAT availed / utilised
Statutory payments
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VAT/CST
 VAT/CST Payable
 2% reduction
 VAT Credit
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Excise
 Excise Payable
 Excise paid by cheque / cash
 CENVAT availed / utilised
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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 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
Companies Act,
1956 / 2013
As per income
tax Act, 1961
Purchase of
asset up to
/after 30th
September
Profit/loss on sale of FA
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Purchase price
Depreciation
WDV
Sale value
Profit
100000
20000
80000
90000
10000
Purchase of
asset - pro
rata
calculation
…Depreciation calculation –
Profit on sale of assets
Entries for Corporates
Entries for Non-corporates
Accum Deprn A/c Dr
To Gross Block
20,000
20,000
Cash/Bank A/c Dr
To Gross Block
90,000
90,000
Gross Block A/c Dr
10,000
To Profit on sale of asset 10,000
Cash/Bank A/c Dr
To Fixed Asset
90,000
90,000
Fixed ASset A/c Dr
10,000
To Profit on sale of asset 10,000
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
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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
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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
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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
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…Deferred tax Calculation Example
Based On Difference of
Depreciation
Based On Difference
of WDV
Net Block as per
Books
Less:Value of land
13803196
26250
13776946
WDV as per IT Act
13436226
Diff in WDV as per
IT and books
340720
Deferred tax asset
@ 30.9%
105282
Depreciation as per
books of account
495432
Depreciation as per
IT Act
393269
Difference in amount
of depreciation
102163
Deferred tax assets
@30.9%
Opening Balance
39609
Opening balance
To be provided
65673
Addition
Closing Balance
105282
Closing Balance
31568
212218
31568
243786
Provision for taxation…
Compute taxable income as per Income
Tax Act, 1961
 Calculate Tax Payable at applicable rate
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…Provision for taxation
Net Profit as per P/L account before
tax
Add: Depreciation as per books
Donation
(add other disallowances here)
Loss on sale of FA
6801169
2989788
4575
0
9795532
Less: Depreciation as per Income Tax
Act
3,267,999
6,527,533
Less: Deduction u/s. 80G
Taxable Income
2288
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
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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.
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…Finalisation of Partnership Firms Remuneration to Partners Prescribed Limit
Loss/Profit up to
166666 = 150000
166666<Profit
=<300000=90% of
profit
Profit>300000 =
60% of (profit –
300000)+270000
…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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!!! Thank You !!!
!!! never give up !!!