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Basics of Accounting for Startups.CA Varun Nirmal

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Setting expectations right

Contents covered

• Basics of Accounting and its components

• Types of entities – Pros and cons

• Compliances applicable for entities

• Tools to manage your accounts and finance

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Accounting – Definition One ‘official’ definition of accounting defines accounting as follows: "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”

Accounting is a language much like a computer programming language, that facilitates communication and understanding. It has its fair share of syntaxes like Debits and Credits, ledgers etc.

In short - Accounting is the language of business.

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Though it dates back to 8,000 BC, the rest of us don’t quite understand why that language has to be so foreign and at times, so mysterious.

This series looks to demystify the accounting definition and the basic accounting concepts

Accounts Framework - COA

Chart of Accounts acts like a group of folders.. Where you file away every transaction

P&L uses Income & Expenses.

BS the other 3 – Assets, Liabilities and Equity.

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COA contd.

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Assets include Current & Long term assetsLiabilities include Current and Long term liabilities.

What is a Cash Flow statement

This statement tracks the following – Core activity Money in for sales–Money out to cover expenses

• This cycle of money is called as Cash Flow.

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Profit and Loss statement

• You can follow your cash flow in a report called as Profit and Loss report.• This summarizes the business performance over a period of

time . (Jan 1st to December 31st 2013.)• All profit and loss statement would have a heading stating a

period of time with a start date and an end date

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The Whole Picture.

• But tracking only income and expenses is not enough..

• In order to know the whole financial picture, We need to keep track of what Investment you have made and any loans you have taken from bank.

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Contd.

• Accounts receivable.. What your customer owe you. (Assets)• Liability – includes VAT and Service Tax (Liabilities) • Original investment which is called Capital investment and • Retained earnings are the accumulated profits over the years.

Nothing much all sales less all expense over the years.

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Relation between the assets, liabilities and equity.

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The Basic Accounting Equation:Assets = Liabilities + Owner's Capital

This equation has to balance because everything the firm owns (assets) has to be purchased with something, either a liability or owner's capital

Sub functions of Accounting

• Account payable/Supplier/Creditors Function• Accounts receivable/Customer/Debtors function• Banking/Receipt and Payment function• Employee - Payroll

• All the above functions results into :

General Ledger

Trial Balance

Profit and Loss account

Balance sheet

Cash flow statement

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Types of Entities

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Type Proprietorship Partnership Private limited company

Limited Liability Partnership

Ownership Any Business owned by a Individual Business owned by minimum of two partners

Created under the companies Act with 2 shareholders and minimum of 1 lakh Share capital

Private limited company with the flexibility of partnership

Compliance Low Low High Medium to High

Income tax return ITR 4 ITR5 ITR6 ITR6

Credibility perception Low Low to Medium High High

Flexibility High High Low Low

Formation No legal formalities except shop regn certificate

Mutual partnership agreement to be drafted

To be registered and incorporated under companies Act. MOA and AOA to be drafted

To be registered and incorporated under LLP Act under MCA. Partnership agreement to be filed with MCA

Liability Unlimited liability of Proprietor Unlimited liability of partners Limited to the extent of sharecapital

Limited to the extent of partners’ capital

Taxation Taxed at Individual rates Taxed at 30%. Taxable at 30% Taxable at 30%

Audit Tax Audit required only if turnover exceeds 1cr

Tax Audit required only if turnover exceeds 1cr

Statutory Audit is required irrespective of turnover

Statutory Audit is required subject to turnover and capital threshold

STATUTORY COMPLIANCE

SOLE PROPRIETOR

PARTNERSHIP FIRM

AOP/BOI LLP BODY CORPORATES

Excise YES YES YES YES YESService Tax YES YES YES YES YESTax Deduction at Source (TDS)

YES YES YES YES YES

Value Added Tax (VAT)

YES YES YES YES YES

Central Sales Tax (CST)

YES YES YES YES YES

STATUTORY AUDIT NO NO YES YES* YESTAX AUDIT YES** YES** YES** YES** YES**AUDIT DOCUMENTATION

YES* YES* YES* YES* YES*

APPLICABILITY OF REVISED SCHEDULE VI

NO NO NO NO YES

MCA REPORTING (XBRL)

NO NO NO YES YES

INCOME TAX RETURN

YES YES YES YES YES

APPLICABILITY OF STATUTORY COMPLIANCE BY ENTITY TYPE

 Notes:* AOP – Association of person BOI- Body of Individuals Statutory Audit will be applicable if:o The annual t/o exceeds the limit as prescribed under the LLP Act, 2008.o The individual contribution by partner exceeds the limit as prescribed under the LLP Act, 2008.

** Tax Audit will be applicable to the Business Entity if:-o The gross receipts of the entity carrying on business activity exceeds the limit as prescribed u/s 44AB of

Income Tax Act, 1961. o The gross receipts of the entity carrying on any profession exceeds the limit as prescribed u/s 44AB of Income

Tax Act, 1961. o The income of the entity is assessed on a presumptive basis under section 44AE, 44BB or 44BBB. Where such

entity declare an income lower than that presumed under the Sections 44AE, 44BB or 44BBB, they are required get their accounts audited in accordance with Section 44AB.

o Those entities who declare a lower income than the amount presumed under section 44AD are subject to audit under section 44AB only if their income exceeds the basic exemption limit.

APPLICABILITY OF STATUTORY COMPLIANCE BY ENTITY TYPE (CONT…)

Overview:• Service tax is a tax levied on services provided in India on taxable

services provided, except the State of Jammu and Kashmir

• Mandatory registration when turnover crosses threshold exemption limit, presently Rs.10 lakhs

• Service tax is applicable on taxable services-– As Service Provider– As Service Recipient (Reverse charge mechanism)

Payment:• Service Tax is to be deposited to the credit of the Central Government-

– In case of corporate entity - by the 5th day of the next month– In case of non-corporate entity - 5th day of the month following the end of quarter– The due date will be 6th day of next month in case of e-payment.– In case of tax payable for the month of Mar, by Mar 31st

SERVICE TAX

• Service Tax Liability = Tax on Output Service – CENVAT Credit

Filing:• Returns to be filed half yearly in the prescribed Form ST-3– H1 (Apr-Sep) – 25th Oct– H2 (Oct-Mar) – 25th Apr

INTEREST & PENALTY:• Late payment of Service Tax: Interest to be paid as under– If turnover exceeds Rs. 100 lacs : 18% pa, otherwise 15% pa

• Late filing of Return: To be paid as under:• Delay upto 15 days: Rs.500/-• Delay over 15 days but upto 30 days: Rs.1000/-• Delay over 30 days: Rs. 1000/- + Rs. 100/day for period above 30 days subject to maximum limit of Rs. 20000/-

Reference:• Link: http://www.servicetax.gov.in/st-proc-home.htm

Monday, May 1, 2023STATUTORY COMPLIANCE

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SERVICE TAX

Monday, May 1, 2023

• Quarterly filing of TDS Returns by Salaried

• Deductor furnishes TDS Certificate in Form 16 for Salaried persons

• Quarterly filing of TDS Returns by Non-Salaried persons

• For other cases, TDS certificate in Form 16A shall be issued by deductor

STATUTORY COMPLIANCE MATRIX

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TAX DEDUCTED AT SOURCEOverview:

It is the amount deducted from the payment to be made to vendor as tax. Deductor deducts TDS, when the payment / credit exceeds the threshold limit as prescribed under the Income Tax Act, 1961.

Payment:Remittance of TDS deducted to the Central Government by 7th day of the following month in which TDS is deducted and 30th April for quarter ending March

Filing Returns:

• PENALTY:• Late Payment of TDS: Interest at 1.5% p.m. or part thereof to be paid• Period of interest : Deduction of TDS to actual date of remittance• Late Filing of return: Late filing fees of Rs.200/day alongwith penalty ranging

from Rs.10000 to Rs.100000 if period of delay exceeds 1 year

• Reference– Link: http://incometaxindia.gov.in/etds_faqs.asp

Monday, May 1, 2023STATUTORY COMPLIANCE

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TAX DEDUCTED AT SOURCE

Overview• The tax which levied on the value of the good and charged at every

level of value addition is Value Added Tax(VAT)

• VAT is a State levy and provisions and rates of tax differs by State

• Mandatory registration when turnover crosses threshold exemption limit

• The rate at which the VAT is to be charged on the different commodities are specified in the Schedule of Goods under respective VAT Acts

• The input tax paid on the goods can be availed as Input Credit provided (ITC) if the goods are purchased from:– Registered Dealer– Purchase invoice separately provides details about the VAT charged under the

Act

VALUE ADDED TAX

Payment:• The VAT collected under the Act will have to be paid to the credit of State

Government on or before the due date under the respective VAT Acts

Filing:• The Monthly / Quarterly / Annual Returns for VAT is to be filed within the

due date under the respective VAT Acts

Penalty:• Late payment interest alongwith penalty for late filing of returns are

prescribed under the respective State VAT Acts

Reference:• Gujarat VAT Link: http://commercialtax.gujarat.gov.in/vatwebsite/

VALUE ADDED TAX (Cont…)

Income Tax returnIncome tax : Income tax is the direct tax levied on income of the business or individual

• The income tax forms varies for salaried employees, proprietorship, partnership and businesses

• ITR 1 & 2 – For Salaried individuals • ITR 3 – Partners of partnership firm • ITR 4 & 4S – Proprietorship business• ITR 5 – Partnership• ITR 6 – Companies• ITR 7 – Trust and non profits

Due date• Due date for filing tax return is 30th Sep if you are covered under audit .

For persons not covered under Audit, it is 31st July.• For companies, due date for filing tax return is 30th Sep

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Quickbooks as a tool to manage finance• Quickbooks is a simple business management software which helps you

manage your business finances instantly on the go and also does accounting automatically.

- Anytime anywhere access- Professional invoicing - Connect your bank account to reconcile the payments received- Get organized and stay in control of your cash flow- Mobile app to manage expenses on the go.- Inbuilt document center to keep all your records

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