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

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 ACCOUNTING

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.

WHAT IS BOOK KEEPING

TYPE OF ACCOUNTS

Real Accounts(Assets A/c)

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

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

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 Charges……….

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

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 by………………. “Lucas Pasioli”

of………………………… ‘Italy’

In …………………………’1494’[ He said that every transaction have two sides……….. ]

Transactions:

Receiver……..…. Giver

Comes in………….….Goes Out

Expenses/ Losses …. Incomes/ Gains

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“).

Double Entry System

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 Tally Solution Pvt Ltd.Co.

The initial name of Tally Peutronics Pvt. Ltd.

developer of tally software Late Shri S. S. Goenka

finishing touch to the tally Bharat (son of S.S. Goenka)

tally software launched In 1986

double entry system is started In 1494

double entry system Inventor Benedetto Cotrugli, Lucas Pacioli

defaults groups in tally 28 Groups

Item- wise detail of goods 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

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)

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.

Intangible Asset

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

Cash 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

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 Bank Accounts

Capital Account Bank OD A/c

Current Assets Cash-in-hand

Current Liabilities Deposits (Asset)

Direct Expenses Duties & Taxes

Direct Incomes Loans & Advances (Asset)

Fixed Assets Provisions

Indirect Expenses Reserves & Surplus

Indirect Incomes Secured Loans

Investments Stock-in-hand

Loans (Liability) Sundry Creditors

Misc. Expenses (ASSET) Sundry Debtors

Purchase Accounts Unsecured Loans

Sales Accounts  

Suspense A/c  

Pre defined GroupsPre defined Sub Groups Under

Bank Accounts Current Assets

Bank OD A/c Loans (Liability)

Cash-in-hand Current Assets

Deposits (Asset) Current Assets

Duties & Taxes Current Liabilities

Loans & Advances (Asset) Current Assets

Provisions Current Liabilities

Reserves & Surplus Capital Account

Secured Loans Loans (Liability)

Stock-in-hand Current Assets

Sundry Creditors Current Liabilities

Sundry Debtors Current Assets

Unsecured Loans 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 Outflows

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.

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.

Cash Flows

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.

OVERSTATED

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)

Buyer (Deducter)

Bank (Treasury)

Income Tax Department

Form No.16 A

Bills/Services

Buyer deducts TDS and deposit to the authorized bank

Files Quarterly Returns electronically in Form 26 and Form 27A

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

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 Percentage/Rate Of Tax

Alcoholic Liquor 1

Timber Obtained Under Forest Lease 2.5

Timber obtained by any other mode 2.5

Tender Leaves 5

Other Forest Produce, excluding Tender leaves and Timber 2.5

Scrap 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