SRGGLOBAL PRESENTS

ACCOUNTING FOR START UPS

FEBRUARY 23, 2014

SANDEEP GUPTA

MANAGING PARTNER

AGENDA What is Accounting

Accounting Rules and outcomes

Balance Sheet

Profit and Loss account

Cash Flow statement

Important Ratios

Case Study

Compliances

What is Accounting??

Accounting is the process of analyzing and reporting on the financial transactions of a person or an organization

Why do we need it??

• To understand the financial health of your business • To save you money in the long term • To help secure additional funding in the future • To achieve long-term goals • Statutory obligations

Dual Entry Concept – Each transaction has a dual impact – one debit &

one credit.

Accounting Rules and Outcome

Debit vs. Credit

Debit what comes IN, credit what goes OUT

Debit all expenses, credit all Incomes

Debit all Assets, credit all Liabilities

Key Outcomes

Vouchers – Journal, Bank, Cash, receipts, purchase, sales, inventory

Books – Cash Book, Bank Book, Purchase books, sales books

Ledger – General Ledger, Party Ledger etc.

Reports – Balance Sheet, Profit & Loss, Cash flow etc.

Balance Sheet – Company’s Financial health

A report showing summary of your financial position as on a date

For companies – driven by The Companies Act, 1956 recently replaced by The Companies Act, 2013

Accounting Standards as issued by The Institute of Chartered Accountants of India

Important terms

Assets : Your thing—what you own. Key Asset classifications are: Fixed Assets Investments Current Assets Liabilities : What your business owes. Key liability classifications are: Owner’s kitty - Equity Share Capital, Reserve & Surplus Loans – Secured & Unsecured Current Liabilities

Balance Sheet As At ………………….

Liabilities Amount Assets Amount

Equity Share Capital Fixed Assets (net of depreciation)

Reserve & Surplus (Including balance of Profit & Loss A/c) Investments

Loans - Secured & Unsecured Current Assets

Current Liabilities Other Assets

Miscellaneous Expenses to the extent not written off

Total XXX Total XXX

What BS tells you Summary of assets and claims against those assets

Information on Companies ability to pay its debts

How the Company is positioned to carry on its day to day business – Cash vs Accrual

Projecting BS Projecting your balance sheet can be quite a complex accounting problem. The desired result is

not a perfect forecast, but rather a thoughtful plan detailing what additional resources will be needed by the company, when and where they will be needed, and how they will be financed.

Using your last historical balance sheet as a starting point, project what your balance sheet will look like at the end of the 12, 24 -60 month period covered in your Profit & Loss and Cash Flow forecasts.

How will the year's operations affect assets, debts and owners’ equity? For example, if you are planning significant sales growth in the coming year, go through the balance sheet item by item and think about the probably effects of assets.

Ex. ASSETS: Inventory and Accounts Receivable will have to grow. New equipment may be needed for increased production. You may draw down on cash to finance some of this.

Now, since a balance sheet must balance, you need to consider the effects on the other half of the statement, liabilities and equity.

Ex. LIABILITIES & EQUITY: Some of the growth may be financed by profits retained in the business as Retained Earnings. Your Profit & Loss Projection will tell you how much might be available from that source. Funds may be contributed by the owners through contributions of more Invested Capital or loans to the company (Notes Payable to Stockholders). Suppliers may provide some of the financing via increased Accounts Payable. The rest will have to be financed by borrowing, which can be: Short term loans (due within 12 months) such as a line of credit or by Long Term Debt (maturity greater than 12 months).

Accounting Policies Fixed Assets

1. Tangibles

2. Intangibles – acquired/ created/ controlled

3. Depreciation or Amortization

4. Capital work in progress

5. Impairment of fixed assets

Expenditure on new projects and expansion

Inventories

Profit and Loss Account – Performance and achievements

A report card for business’s state of affairs for a particular period

For companies – driven by The Companies Act, 1956 recently replaced by The Companies Act, 2013

Accounting Standards as issued by The Institute of Chartered Accountants of India

Important terms

Income : Revenue what you receive or accrues to your business. Key Income classifications are: Sales Non Operational Income Expenses : Expenses your business commits/pays. Key Expense classifications are: Purchases, Direct Expenses Sales & Administrative Expenses Financial Expenses Depreciation

Profit & Loss for the period ending ………………….

Expenses Amount Income Amount

Purchases Sales

Direct Expenses Non Operational Income

Sales & Administrative Expenses

Finacial Expenses Loss, if applicable

Depreciation

Profit, if applicable

Less: Tax

Distributable Profit

Total YYY Total YYY

Cash Flow Statement

Shows your cash movement for a particular period

Schedule VI of Companies Act

Various ways – Direct, Indirect

Important terms:

Cash Inflow/Outflow from operating activities Cash Inflow/Outflow from Investment activities Cash Inflow/Outflow from financing activities

Cash Flow for the period

PARTICULARS Amount

Profit after Tax

Adjustments for:

Depreciation and Amortisation

Dividends (Payout & Tax)

Operating Profit before Working Capital Charges

Adjustments for:

(Increase) / Decrease in Sundry Debtors

(Increase) / Decrease in Loans & Advances

Increase / (Decrease) in Sundry Creditors

Increase / (Decrease) in Provisions

Net Cash from Operating Activities

Cash Flow from Investing Activities

(Purchase)/ Sale of Fixed Assets

(Purchase)/ Sale of License / Brand Building

(Increase) / Decrease in Investments

Other Income

Net Cash from Investing Activities

Cash Flow from Financing Activities

Increase in Share Capital

Proceeds from / (repayment) of secured loans

Proceeds from / (repayment) of unsecured loans

Interest Expenses

Net Cash from Financing Activities

Net Increase in Cash & Cash Equivalents

Opening Cash Balance

Closing Cash Balance

Important Ratios

Current Ratio – Current assets / Current liabilities Return on Equity –Net income / Average shareholders equity Debt Equity Ratio – Total liabilities / Shareholders equity Debt Service Coverage Ratio – Operating cash flow / Total debt service (annual) Price Earning Ratio - Price per share / Earning per share (EPS) Market Capitalization – Market value of companies outstanding shares Break Even point Cash Burn

How do I know how I am doing You have positive cash flow

You have accurate records

You are paying taxes, loans and expenses on time

You have an accurate idea of Income and expense

You are hitting your targets

You are paying yourself

Case Study

Mr. A started his business and introduced capital of Rs 1 lac. During the year ending 31st March 13, he did following transactions: a) Sales of Rs 4 lacs b) Purchases of Rs 3 lacs c) Incurred direct expenses of Rs 25000 d) Sales & administrative expenses of Rs 30000 e) Purchased fixed assets of Rs 50000 f) Depreciation on fixed assets of Rs 5000 g) Debtors as on 31st March 13 was Rs 25000 h) Creditors as on 31st March was Rs 10000 i) Borrowed unsecured loan of Rs 100000 j) Paid interest and bank charges of Rs 10000

Balance Sheet As At 31st March 2013

Liabilities Amount Assets Amount

Equity Share Capital 100000 Fixed Assets (net of depreciation) 45000

Reserve & Surplus (Including credit balance of Profit & Loss A/c) 21000 Investments 0

Loans - Unsecured 100000 Current Assets

Current Liabilities 10000 -Debtors 25000

- Cash and Bank balance 161000

Miscellaneous Expenses to the extent not written off 0

Total 231000 Total 231000

Profit & Loss for the year ending 31st March 2013

Expenses Amount Income Amount

Purchases 300,000 Sales

400,000

Direct Expenses 25,000

Sales & Administrative Expenses 30,000

Finacial Expenses 10,000

Depreciation 5,000

Profit before tax 30,000

Less: Tax (assuming 30%) 9,000

Profit after tax (transfer to Capital A/c)

21,000

Total

400,000 Total

400,000

Cash Flow Statement As At 31st March 2013 As At PARTICULARS 31st March 2013

Profit after Tax 21000

Adjustments for:

Depreciation and Amortisation 5000

Operating Profit before Working Capital Charges

Adjustments for: (Increase) / Decrease in Sundry Debtors (25000) Increase / (Decrease) in Sundry Creditors 10000

Net Cash from Operating Activities - A 11000

Cash Flow from Investing Activities

(Purchase)/ Sale of Fixed Assets (50000) (Increase) / Decrease in Investments 0

Net Cash from Investing Activities - B (50000)

Cash Flow from Financing Activities

Increase in Share Capital 100000

Proceeds from / (repayment) of unsecured loans 100000

Net Cash from Financing Activities - C 200000

Net Increase in Cash & Cash Equivalents

Opening Cash Balance 0

Closing Cash Balance (A+B+C) 161000

Compliance Framework • New Company

– Local Laws

– Income Tax / withholding Tax / Wealth Tax

– Service Tax

– Company Law

– Exchange Control

– Labor Regulations

CENTRE 1.Direct Tax

2.Exchange Control

3.Company Law

4. Customs

5..Excise

6.Service Tax

7.Labour Regulations

STATE 1. CST / VAT

2. GST

(PROPOSED)

3. Entry Tax

4. Stamp Duty

LOCAL 1. Octroi

2. Municipal Tax

3. Lease Tax

4. Professional Tax

Regulation Manufacturing Trading Service

Direct Tax • • •

Exchange Control • • •

Company Law • • •

Customs • •

Excise •

Service Tax •

Labor Regulations • • •

CST / VAT •

Stamp Duty • • •

Octroi • •

Entry Tax • •

Lease Tax • • •

Municipal Tax • • •

Professional Tax • • •

Taxes • DIRECT

– Income

– Wealth

• INDIRECT

– Service

– CST / VAT / Lease

– Customs

– Excise

• LOCAL

– Octroi

– Municipal

– Stamp Duty

– Professional

DIRECT TAX

INCOME TAX • Applicability

– All Corporates

– All individuals having income exceeding taxable limit, including expat

• Compliance – Obtaining Permanent Account Number (PAN)

– Deposit advance tax quarterly

– Tax Audit - if gross turnover exceeds INR 100 million

– File Annual Return of Income

– Global income of expat to be taxed subject to DTAA provisions.

Personal Income Tax INCOME RANGE

(INR)

RATE(%)

UPTO 200,000 NIL

200,001-500,000 10

500,001-10,00,000 20

10,00,001 and above 30

1 Surcharge at 10 per cent when income exceeds Rs. 10,000,000 2 Surcharge at 2.5 per cent

CATEGORY RATE (%)

DOMESTIC 30 1

FOREIGN 40 2

Corporate Tax

ADVANCE TAX MECHANISM

1ST INSTALLMENT

15TH JUNE

15%

2ND INSTALLMENT 15TH SEPTEMBER 45%

3RD INSTALLMENT

15TH DECEMBER

75%

FINAL INSTALLMENT

15TH / 31ST MARCH

100%

WITHHOLDING TAX • APPLICABILITY

– Salaries of Expat, local employees

– Fee for Professional / Technical Services

– Payments to Contractors Rent

– Payments to non-residents

• COMPLIANCE

– Obtaining Tax Deduction Account Number

– Deposit on a monthly basis

– File Quarterly Returns

– Issue Withholding Tax certificate quarterly.

Withholding Tax Rates NATURE OF PAYMENT CORPOR

ATES INDIVIDUALS

Contractual 2 1

Lease – Real Estate 10 10

Lease – Equipment 2 2

Professional / Technical 10 10

Commission / Brokerage 5 5

Non – Resident As per domestic

laws / DTAA

As per domestic

laws / DTAA

WHT compliance dates DUE DATES OF DEPOSIT OF TAX WITHHELD

DUE DATE OF FILING OF QUARTERLY RETURN

7TH OF SUCCEEDING MONTH

QUARTER 1 – 15TH JULY

FOR 31ST MARCH

DUE DATE IS 31ST MAY

QUARTER 2 – 15TH OCTOBER

QUARTER 3 – 15TH JANUARY

QUARTER 4 – 15TH JUNE

TRANSFER PRICING • Arms length transaction between associated

enterprises

• Transfer pricing study

• Transfer pricing report

• Transfer pricing report with annual return of income tax

TRANSFER PRICING • Associated Enterprises

Participation in management or capital or control

Shareholding carrying 26% or more voting rights (directly or indirectly)

Providing loan constituting 51% or more of the book value of the total assets

Providing guarantee of 10% or more of total borrowings

Appointing more than half of the board of directors or one or more executive directors

Providing intangibles on which the business is wholly dependent

WEALTH TAX

• Applicability

– Wealth exceeding taxable limit of INR 3 million ($ 60 K)

• Compliance

– Obtaining Permanent Account Number (PAN)

– Deposit wealth tax

– File Annual Return of Wealth

INDIRECT TAX

Indirect Taxes • Customs Duty – On imports of goods

• Excise Duty – On Goods manufactured

• Goods Tax (Sales Tax / VAT) – On Sale / purchase of goods

• Service Tax – On Services

SERVICE TAX • Applicability

– Providing taxable service

– Receipt of service from non-resident under reverse charge

• Compliance

– Obtaining Service Tax Registration Number – centralized or decentralized

– Computation of CENVAT credit for input services

– Deposit service tax monthly

– File Half yearly return of Service Tax

SERVICE TAX • Registration with Service Tax Authorities –Single /

Multi-location

• Deposit of service tax on a monthly basis

• Filing of half-yearly returns

• Input credit mechanism

• Reverse charge implications on certain payments

SERVICE TAX DUE DATE OF DEPOSIT OF SERVICE TAX

DUE DATE OF FILING OF BI-

ANNUAL RETURN

5th of succeeding month

25th Octorber

For March Due Date is 31st March

25th April

SECRETARIAL

Secretarial • Applicability

– All Corporates – No Threshold for exemptions

• Compliance – Registration of company with Registrar of Companies

of relevant jurisdiction

– Director’s Identification Number (DIN)

– Digital Signature Certificate (DSC)

– Board Meetings / Shareholders’ Meetings

– Annual Return

– Financials to be audited

– Filing of forms for specific events

COMPANY LAW • Maintenance of books of account

• Audit

• Board Meetings

• Shareholders’ Meetings

• Filing information with the Company Law Authorities

• Accounting Year

• Indian GAAP/ IFRS

• Consolidation

COMPANY LAW – Specific Issues • Minimum 2 shareholders -concept of single

shareholder company proposed • Both to be non-resident corporate entities for the

company to be a private company [ S. 4(7) ] • Board Meetings to be held quarterly –anywhere in

the world. Minimum 2 Directors to be physically present

• Shareholders’Meetings (AGM) to be held annually in the city where Registered Office is located

• Companies having a paid up Capital of INR 50 million or more to appoint a full time Company Secretary

EXCHANGE CONTROL

Exchange Control • Applicability

– Subsidiary of foreign company – Overseas receipts / remittances – External Commercial Borrowings (ECB) – Royalty / Fee for technical services – Fee for use of Brand name – Current Account / Capital Account Transactions

• Compliance – RBI intimation through authorized dealer For overseas receipts – Filing of FC-GPR/ FC-TR – Certification before any remittance Overseas – Prior permission for ECB under approval route and filing of return – Prior permissions for Current and Capital account transactions

LABOR REGULATIONS

PROVIDENT FUNDS • Applicability

– If number of employees equal to or greater than 20

– Special provisions for Expatriate Employee

• Compliance

– Registration with Provident Fund Commissioner of relevant jurisdiction.

– Employee to contribute 12% of Basic Salary – equal share by Employer

– Monthly deposit

– Monthly / Annual returns to be filed

– Mandatory for International workers

LOCAL LAWS

Local Laws • Shop & Establishment Act

• Professional Tax

International Workers • Employment Contract

• Employment VISA

• Registration with FRRO/ Annual Renewals

• Registration with the tax authorities

• Global income of expat to be taxed subject to DTAA provisions

• Social Security

THANK YOU