FINANCIAL ACCOUNTING AND

TAXATION

BUSINESS

Businesses are everywhere. They are the units that perform most of the economic activity in our economy. Businesses exist to generate a profit. The traditional definition of a business is an entity that brings together time, effort and capital in order to produce a profit.

Following are the characteristics of a business:

Human Activity

Financial Nature

Profit Motive

Continuously

TYPE OF BUSINESS

Industry( Manufacturing)

Trade( sale/ Purchase)

Commerce(Service Sector)

WHAT IS ACCOUNTING

Up to 1974, accounting was done the same way that the Egyptians did

it 3,000 years before. Accounting is the art of systematic recording,

reporting, and analysis of financial transactions of a business. The

person in charge of accounting is known as an accountant.

WHAT IS BOOK

KEEPING

Bookkeeping is the recording of financial transactions. Transactions include

sales, purchases, income, receipts and payments by an individual or

organization. Bookkeeping is usually performed by a bookkeeper.

TYPE OF ACCOUNTS

Real Accounts

Personal Accounts

Nominal Accounts

Real Accounts(Assets A/c)

Cash, Stock, Purchase, Sales, Building, Machine,

Furniture, Goodwill, Patent, Copy-Right, Trade Mark, Investments, Motor Cars etc¼¼

Personal Accounts( A/c)

Ram, Rajesh, X, Y, Z, Capital, Drawing, Outstanding Expenses,

Prepaid Expenses, Accrued, Income, Un-accrued Incomes A/c,

Debtors A/c, Creditors A/c, Bank A/c, Reliance, TATA, IMT, DMC

Career Academy, Shantosh Hospital, BSNL, Railway etc.

Nominal Accounts

Salary, Wages, Discount, Rent, Commission, Postage, Refreshment, Carriage, Depreciation, Interest, Bank Charges¼¼¼.

BRANCHES OF ACCOUNTING

Financial Accounting

It is the original form of accounting.

It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc.

The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.

Cost Accounting

Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost.

Management Accounting

It is accounting for management. Accounting which provides necessary

information to the management for discharging its functions.

It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities

ACCOUNTING ENTRY SYSTEM

Single Entry System

Double Entry System

Single Entry System

It means to record one side of entry. Suppose, we sell our furniture, we have not

to record furniture sale but we just record total cash received from furniture. So, in single entry accounting, we records cash, account receivables,

Double Entry System

Invented by¼¼¼¼¼¼. "Lucas Pasioli"

of¼¼¼¼¼¼¼¼¼¼ 'Italy' In

¼¼¼¼¼¼¼¼¼¼'1494' [ He said that every transaction have two sides¼¼¼.. ]

Transactions:

Receiver¼¼..¼. Giver

Comes in¼¼¼¼.¼.Goes Out

Expenses/ Losses ¼. Incomes/ Gains

Double Entry System

In this system, both cash and credit transactions are recognized.

The double entry system was first used in Genoa, Italy around the 13th

century and was further polished in Venice.

all transactions will have dual aspects (debit and credit) and that is

why it's called Double Entry System.

The word Debit comes from the Latin word "debita" (Italian "debito").

The word Credit comes from the Latin word "credo" (Italian "credito").

What is Tally

Tally is used to store and maintain daily business transactions like purchases, sales, receipts, payments, purchase returns, sales returns, deposits and withdrawals etc.

popular FA software packages are Tally, Busy etc.

Tally is the number one financial accounting package in India and is also used abroad.

With tally you could be the owner, the financial controller, accountant, manager, auditor or anyone connected with accounts. The fundamentals behind tally are simple enough for learn accounting

Essential Feature

Tally is the software of The initial name of Tally

developer of tally software

finishing touch to the tally

tally software launched

double entry system is started

double entry system Inventor

defaults groups in tally

Item- wise detail of goods

Tally Solution Pvt Ltd.Co. Peutronics Pvt. Ltd.

Late Shri S. S. Goenka

Bharat (son of S.S. Goenka)

In 1986 In

1494

Benedetto Cotrugli, Lucas Pacioli

28 Groups

Inventory

GROUPS

Groups are collection of Ledgers of the same nature. Account Groups are maintained to determine the hierarchy of Ledger Accounts which is helpful in determining and presenting meaningful and compliant reports.

Choosing a correct group for a ledger account help in viewing the financial position in a better way otherwise the financial statements will not give a true and correct picture.

Classification of Asset

Asset

Tangible Intangible

Fixed Current Definite Indefinite

Tangible Asset

Fixed Asset

Assets that have a physical form.

Tangible assets include both fixed assets, such as machinery, buildings and

land, and current assets, such as inventory.

Assets are property or economic resources that are expected to provide a

future benefit to a business

Current Asset

Definition of Current Assets: assets in the form of cash (or easily convertible into cash)

Intangible Asset

An asset that is not physical in nature.

Corporate intellectual property (items such as patents, trademarks,

copyrights, business methodologies)

Goodwill and brand recognition are all common intangible assets in

today's marketplace.

An intangible asset can be classified as either indefinite or definite

depending on the specifics of that asset. A company brand name is

considered to be an indefinite asset, as it stays with the company

as long as the company continues operations.

Liability

Current liabilities — these liabilities are reasonably expected to be

liquidated within a year. They usually include payables such as

wages, accounts, taxes, and accounts payables, unearned revenue when adjusting

entries, portions of long-term bonds to be paid this year,

short-term obligations.

Long-term liabilities — these liabilities are reasonably expected not to be

liquidated within a year. They usually include issued long-term bonds,

notes payables, long term leases, pension obligations, and long-term

product warranties.

TYPE OF DISCOUNT

Trade Discount

It is rebate or allowance from the scheduled price granted by the seller to the buyer. Trade discount is usually granted in the following circumstances: When selling to a fellow trader. When the buyer is an old customer. When sales are made in bulk.

As the Custom of trade

Cash Discount

It is deduction or allowance allowed by creditor to a debtor. If a person pays his debit before the due date of payment the recipient may grant him an allowance for doing so. This allowance is known as cash discount

Primary and Subgroups 15 Primary Groups 13 Sub Groups

Branch / Divisions

Capital Account

Current Assets

Current Liabilities

Direct Expenses

Direct Incomes

Fixed Assets

Indirect Expenses

Indirect Incomes

Investments

Loans (Liability)

Misc. Expenses (ASSET)

Purchase Accounts

Sales Accounts

Suspense A/c

Bank Accounts

Bank OD A/c

Cash-in-hand

Deposits (Asset)

Duties & Taxes

Loans & Advances (Asset)

Provisions

Reserves & Surplus

Secured Loans

Stock-in-hand

Sundry Creditors

Sundry Debtors

Unsecured Loans

Pre defined Groups Pre defined Sub Groups Under

Bank Accounts

Bank OD A/c

Cash-in-hand

Deposits (Asset)

Duties & Taxes

Loans & Advances (Asset)

Provisions

Reserves & Surplus

Secured Loans

Stock-in-hand

Sundry Creditors

Sundry Debtors

Unsecured

Loans

Current Assets

Loans (Liability)

Current Assets Current

Assets

Current Liabilities

Current Assets

Current Liabilities

Capital Account

Loans (Liability)

Current Assets

Current Liabilities

Current Assets

Loans (Liability)

Cash Flows

During the business cycle, you will have more money flowing in than flowing out.

This will allow you to build up cash balances with which to plug cash flow gaps, seek expansion and reassure lenders and investors about the health of your business.

Your aim must be to speed up the inflows and slow down the outflows

Cash Flows

Cash Inflows

Payment for goods or services from your customers. Receipt of a bank loan. Interest on savings and investments. Shareholder investments. Increased bank overdrafts or loans.

Cash Outflows

Purchase of stock, raw materials or tools. Wages, rents and daily operating expenses. Purchase of fixed assets - PCs, machinery, office furniture, etc. Loan repayments. Dividend payments. Income tax, corporation tax, VAT and other taxes.

OVERSTATED

Overstated is that amount which is more than correct amount in the account. It is error of commission and it can rectify by passing rectify entry. For instance, if outstanding wages are wrongly written Rs. 12000 but actual outstanding wages are Rs. 10,000, then Rs. 2000 is overstated and its bad effect will be on wages account because wage account will also overstated with Rs. 2000 and our profit will reduce with Rs. 2000. So, to rectify to overstated error is must.

What is Tax

A fee charged by a government on a product, income, or

activity.

If tax is levied directly on personal or corporate income, then it

is a direct tax.

If tax is levied on the price of a good or service, then it is called

an indirect tax.

The purpose of taxation is to finance government expenditure.

One of the most important uses of taxes is to finance public

goods and services, such as street lighting and street cleaning.

Taxes in Tally

Value Added Tax

Tax Deducted at Source

Service tax

Tax Collected at Source

Central sales tax

Fringe benefit Tax

Excise tax

Value Added Tax

Value added tax is a consumption tax.

This is a simple method of multiple taxes on an individual product.

VAT system levies tax on every level of value addition to the product or

goods.

This is the new system being implemented from April 1, 2005.

VAT is calculated based on Input & Output variation.

Input tax is paid on purchases.

Output tax is paid on sales.

Input credit is the excess amount of input tax over output tax

VAT rates

There are three main rates for Input and Output Vat

tax.

0% for Agriculture products.

1% for Jewellery

4% for Pharma, Computers, Soaps etc.

12.5% for Cement, Automobile

Tax Deducted at Source

Tax deducted at source (TDS) is one of the modes of collecting income tax.

The buyer (deductor) deducts the tax from the payment made to the seller (deductee) and remits the tax to the Income Tax Department within the stipulated time.

The buyer makes payments (such as salary, rent, Interest on securities, dividends, insurance, commission, Professional fees, commission on brokerage, commission on lottery tickets, etc) to the seller.

TDS Deduction Chart

Seller ( Deductee)

Bills/ Services

Files Quarterly Returns electronically in Form 26 and Form 27A

Buyer (Deducter)

Buyer deducts TDS and deposit to the authorized bank

Bank (Treasury)

Form No.16 A

Income Tax Department

Electronic TDS (E-TDS)

E-TDS return is a TDS return prepared in form No.24, 26 or 27 in electronic media as per prescribed data structure in either a floppy or a CD ROM.

The floppy or CD ROM prepared should be accompanied by a signed

verification in Form No.27A. As per Section 206 of Income Tax Act all

corporate and government deductors are compulsorily required to file

their TDS return on electronic media.

Service Tax

Service tax is indirect tax on services provided. Service tax is

paid by buyer of services to seller of services, who in turn,

deposits the tax with the government.

Some Service Tax categories are- Advertising Agency, Cable

operators, Maintenance and Repair service, Courier , Life

insurance Services, Telephone services, Banking and Financial

Services.

Credit Adjustment in Service Tax

The Service Tax paid by you on input services to your business

can be adjusted to the Service Tax payable by you. This is

called 'adjustment of Service Tax Credit.

If your input service (purchase) can be directly related to the

output service (sale) then you can use 100% credit adjustment

on the service tax payable.

If the input service is not solely used for the output service, then

20% credit adjustment is applicable.

What is ERP

ERP is an abbreviation for Enterprise Resource Planning.

It is principally an integration of business management

practices and modern technology.

The term ERP originally referred to the way a large organization

planned to use its organizational wide resources.

It is a company-wide computer software system used to

manage and coordinate all the resources, information, and

functions of a business from shared data stores.

Enterprise Resource Planning

Purchase

Production Planning Inventory

ERP Payroll

Process Taxation

Sales Accounting

Tax Collected at Source

TCS is Tax Collected at source by the seller on sale of some specified goods .

Goods are defined under section 206C of the Income Tax Act, 1961 .

Some specific goods under TCS are Tendu leaves, Timber obtained under a forest lease, Scrap, etc.

Nature Of Goods

Alcoholic Liquor

Timber Obtained Under Forest Lease

Timber obtained by any other mode

Tender Leaves

Other Forest Produce, excluding Tender leaves and Timber

Scrap

Percentage/Rate Of Tax

1

2.5

2.5

5

2.5

1

Exemption

A buyer who purchases specified goods for manufacturing, processing or production of goods/article or thing and not for trading, no tax would be deducted. In such cases the buyer would declare it in Form 27C to the seller.

The seller in turn would deliver one copy of Form 27C collected from buyer to Chief Commissioner/Commissioner of Income tax.

Central Sales Tax

This is the system being implemented from 1956.

Central state tax (CST) is Sales Tax arising from Inter-state sales (when goods sold move from one state to another).

In case of any Inter state sales between two registered dealers, a prescribed CST declaration Form must be issued to buyers/sellers.

Every dealer who effects inter-state sale is required to register with State sales tax authorities who are empowered to grant registration under CST Act. Application should be in form 'A'. Security has to be furnished. Certificate of registration will be in form 'B'.

Forms Under CST

Form C, E-I/E-II, F, G, H, I and J have been prescribed to avail concessional rate of CST.

Form C and E-I/E-II and F are required to be collected and submitted on quarterly basis.

In case of forms H, I and J, no time limit has been prescribed.

F form is to be obtained on monthly basis

CST (C Form)

A Form issued by the sales tax department to the registered

sales tax payer.

If Person buys any good from another registered sales tax

payer and issues a C form to him. Than that other sales tax

payer will not charge sales tax from him and sales tax will be

collected and deposited by the c form issuer and deposited in

the treasury of the govt.

If C form is lost, indemnity bond in form G is to be given and

then duplicate C form can be issued.

Fringe Benefit Tax

Fringe benefit tax (FBT) is a tax on benefits that

employees receive as a result of their employment,

including those benefits provided through someone

other than an employer.

Fringe benefits (perks) include most benefits given to

employees in addition to their salary or wages.

Category of FBT

Entertainment Festival celebrations

Gifts

Use of club facilities

Employee welfare

Use of health club, sports and similar facilities

Sales promotion, including publicity

Use of telephone

Scholarship to the children of the employees.

Excise Tax

An excise or excise tax (sometimes called a duty of excise or a

special tax).

It is commonly understood to refer to an inland tax on the sale, or

production for sale, of specific goods within a country.

Excises are distinguished from customs duties.

An excise is considered an indirect tax, meaning that the producer

or seller who pays the tax to the government is expected to try to

recover or shift the tax by raising the price paid by the buyer.

Payroll Processing

Having access to employees pay, bonus, and other

special income records can be crucial for managers.

Businesses may even consider choosing a payroll

service systems that offers financial advise and one

that can analyze payroll records.

l

Process of payroll

Salary detail

Pay head

Type

Employee Group

Payroll processing

Attendance /Production

Employee

Unit (Work)