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Month: September 2019

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Adjustment entries in Tally for accruals and advances

As most of us would be aware, matching principle is one of the most…

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Adjustment entries in Tally for accruals and advances

As most of us would be aware, matching principle is one of the most important principles of accounting. In simple words, it prescribes that all expenses and revenues related to the accounting period should be mapped / accounted for in that accounting period itself. (You could learn in more detail in accounting classes at S20). 

Having said that, there are times when expenses may be paid in advance or revenues may not have been booked. This calls for adjusting the books of accounts with appropriate accounting entries to reflect the true picture that pertains to that particular accounting period. It is here that the adjustment entries come into play. 

Adjustment entries could be on account of two factors: Accruals and Advances. These instances are explained below, alongwith accounting entries to be passed for the same in Tally. These adjustment entries are passed as Journal Vouchers in Tally.

  1. Accruals
    • Expense Accruals
      This represents expenses incurred (say on account of goods purchased or services availed), however not yet accounted for (maybe because invoice has not been received). For example, accounting period is April – March. Electricity bill for March is received in April of the following year. Since electricity has been consumed and expenses have been incurred in the true sense, the same should be accounted for in that year ending 31 March as well. When accruing expenses, the expense account would be debited and instead of sundry creditors, credit is taken to provision for expense account / expense payable account. Thus, accounting entry in Tally would be:
    • Income Accruals
      This represents income accrued/ earned but not recorded, mostly because it is not due.For example, billing cycle agreed with the customer is 3-monthly beginning February. Therefore, while services would have been rendered for February and March, but invoice cannot be raised until April as the right to collect arises only then. As per matching principle, revenue corresponding to the months of February and March should be accounted for. When accruing income, the income account would be credited and instead of sundry debtors, asset account namely income accrued but nor due is created. Thus, accounting entry in Tally would be:

      Having passed afore-said entries, the profit and loss account would now truly reflect the revenue and expense for the accounting period.

  2. Advances
    • Expenses Paid In Advance
      When expenses are paid for a period falling outside the accounting period, books should be adjusted to capture only the amount that pertains to the accounting period for which books are being prepared.For example, annual insurance of Rs. 12,000 is paid in December while the accounting period followed is April – March. In that case, Rs. 8,000 pertaining to April – November of the following year should be excluded from the profit and loss account. This could be done as under:

      Thus, net insurance debited to P/L for the year would be Rs. 4,000 only, pertaining to the period December – April.

    • Incomes Received In Advance
      Contractual terms may require the customer to pay advances upfront. In case where such advances do not get settled within the accounting period under consideration, they should appear as liability account. For example, for a contract signed in March, advance received from customer for the quarter is Rs. 30,000. Assuming April – March year is followed, once services are rendered in March, proportionate part would go to revenues. However, remaining advance should continue to stand as a liability in the books. Entries would be as under:

      Thus, at year-end, only revenue of Rs. 10,000 would go to P/L while net advance of Rs. 20,000 would appear as a liability in the Balance Sheet.

      While this is the gist of the journal entries, a more step by step approach for accounting in Tally can be learnt at accounting classes at Super 20 Training Institute in Ahmedabad.

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Components of GST: CGST, SGST and IGST

In India, the Constitution provides rights to both Centre and the States to levy…

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GST - Goods & Service Tax

In India, the Constitution provides rights to both Centre and the States to levy and collect taxes. GST has been introduced as a substitute for old levies – central levy of customs, excise and service tax and state levy of VAT. It is therefore only fair that states should also have a share in GST collections, and that the entire levy should not go to the Centre’s kitty. It was in fact for this reason that the law could not be implemented earlier for a long time until the Centre and all States reached a consensus.

However, now that the law is applicable, it is levied by both Center and States simultaneously. This is in sharp contrast to the erstwhile regime, considering that the taxes were levied separately and in fact had cascading effect. GST is applicable based on place of supply and nature of supply. Detailed principles can be studied at some good GST classes. Meanwhile, if one were to put it in simple terms, it is applicable in the following manner:

  1. When it is an intra-state supply – CGST and SGSTWhen goods/ services are supplied within the same state, Central GST and State GST are levied. Seller must collect both from the buyer and as the name suggests, CGST is deposited with the Central Government, while SGST is deposited with the State Government. Both these components are governed by separate legislations – Central Goods and Services Tax Act, 2017 and separate SGST Acts of various states.As for Input Tax Credit, it can be availed against the output liabilities as under:
    1. CGST liability can be paid using:

      1. first, input tax credit under CGST
      2. then, input tax credit under IGST
    2. Similarly, SGST liability can be paid using:
      1. first, input tax credit under CGST
      2. then, input tax credit under IGST

     

  2. When it is an inter-state supply – IGST

When the goods/ services are sold from one state to another, Integrated GST is levied. It is to be deposited with the Central Government. It may be mentioned here that the governments do apportion amongst themselves (Centre and states), however that is not relevant from the seller’s perspective who has to pay it to the Central Government. 

The afore-said rules apply to imports and exports too, and even where the supply is from or to an SEZ unit. 

IGST is levied under Integrated Goods and Services Tax Act, 2017.

Input Tax Credit can be availed against output IGST liability. The order to be applied for paying IGST liability is:

  1. First, utilize input tax credit under IGST 
  2. Then, utilize that under CGST 
  3. Then, utilize credit under SGST 

Hope the above provides a good overview of the basics. For deeper understanding of the concepts with examples, you could subscribe to GST course at Super 20 Training Institute in Ahmedabad.

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All About Deferred Tax – What You Need To Know

Contrary to its name, deferred tax is actually an accounting concept. It is governed…

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deferred tax simplfied - what you need to know

Contrary to its name, deferred tax is actually an accounting concept. It is governed by Accounting Standard 22, which is studied as part of course curriculum of most accounting classes.

In reality, deferred tax is not any form of tax expense paid/payable to the government. It represents accounting for difference between tax expense as per books and as per tax return filed by a taxpayer entity.

Differences in tax expense as per books and as per tax return could occur on account of various reasons, for example the rate at which depreciation on certain asset is accounted for in books may be higher/lower than what is permitted as per income tax law. Another example could be donations made by the company – while they are recorded as expense in profit and loss account, they are not an allowable deduction while computing taxable income.

All such differences are to be classified as either timing difference or permanent difference. Timing differences are those which will get reversed in the future. However, permanent differences are those which, as the name suggests, are permanent in nature and will not be reversed in the future. In the above example, while the book depreciation rate may be different than tax depreciation rate, the cost of asset would eventually be depreciated in entirety in both books and tax records. It is merely that the period over which it is depreciated will differ. Hence, it would qualify as timing difference. On the other hand, donation is never allowed as an expense and therefore qualifies as a permanent difference.

Deferred tax is recognised only on timing differences. Depending upon the nature of timing difference, either a deferred tax asset is created or a deferred tax liability is recognized in a financial year. Every year, the position is revisited and the deferred tax asset or deferred tax liability may be reversed depending upon the calculations made.

When there is a disallowance / addition to Profit before tax in tax return, deferred tax asset is created. When additional deduction / allowance is claimed from Profit before tax in tax return, deferred tax liability is created. Instead of mugging it up, whether an asset is to be created or liability, can be understood in logical terms as under:

  • When a disallowance / addition is made in tax return vis-a-vis the expense booked in books, it implies that taxable income is higher in current year, i.e. tax paid is higher now, thus lower tax would need to be paid in future, hence recognize an asset now.

  • Conversely, when higher deduction is claimed in tax return vis-a-vis the expense booked in books, it implies that taxable income is lower in current year, tax paid is lower now, thus higher tax would need to be paid in future, hence recognize a liability now.

Accounting Standard 22 provides for various other aspects related to deferred tax recognition as well, such as:

  • deferred tax is to be recognized at enacted or substantively enacted rate as on balance sheet date
  • deferred tax asset is recognized when there is ‘virtual certainty’ that the asset can be reversed in the future
  • deferred tax getting reversed within the tax holiday period should not be recognized

This might sound like too complicated and confusing, but if one were to think logically, the concept of deferred tax is pretty simple. Accounting classes at Super 20 Training Institute can help you learn complex accounting concepts such as these with ease.

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All About Assessment Proceedings

Every democratic country has three wings – the legislators, the administrators, and the judiciary.…

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Assessment Proceedings

Every democratic country has three wings – the legislators, the administrators, and the judiciary. As has always been the case with any law, once it is enacted by the law-makers / legislators, it is expected that the public at large must abide by it. In order to ensure that the law is being followed, there are administrators, and in case of disagreement between the two, there is judiciary to resolve these issues.

Background

In the context of income tax as well, the law (Income Tax Act, 1961) has prescribed a set of rules and compliances. It is expected of people to honestly follow the same. At the same time, an administrative body – the Income Tax Department – has been set up in order to ensure correct implementation of the law. 

Once a tax return is filed by a taxpayer, it is picked up for processing. It may be accepted as it is. On the other hand, should the department feel the need, it can make some inquiries from the taxpayer regarding various incomes declared / not declared by him. These inquiries are conducted as part of assessment proceedings. The law provides for various kinds of assessment proceedings, the manner in which they must be conducted, and the time frame within which they must be initiated and completed. A good knowledge on the subject can be gathered from commerce course at Super 20 Training Institute. Nevertheless, an overview is provided below.

Types

The main type of assessment proceeding is Scrutiny assessment. Some key aspects are:

  • Requisite notice must be issued in order to initiate the same
  • Such notice can be issued within 6 months from the end of the financial year in which return is filed
  • The time frame to complete this assessment is 21/ 18/ 12 months from the end of the assessment year (depending upon which year’s assessment it is) 

Scrutiny assessment is clubbed with other provisions of the Income Tax Act in certain situations, such as:

  • Best judgment assessment: when the taxpayer doesn’t cooperate / submit information, the tax officer can make an assessment on the basis of information available with him
  • Section 148 assessment: when the income considered to have escaped assessment exceeds specified limits and the afore-said time period of 6 months to issue notice has expired
  • Block assessment: when search / survey has been conducted, and assessment proceedings of multiple years are to be pursued on the basis of evidence collected during such search / survey.

How is scrutiny assessment conducted?

Once a notice is received, it is usually accompanied by a questionnaire seeking information as the tax officer may deem fit. The assessee must prepare a response and appear before the tax officer with all explanations. In case there is no questionnaire, the tax officer may ask for information during the course of discussion. The assessee can always seek some time which he thinks he will require to collate the details. If the tax officer considers the request reasonable, he would allow the assessee to come back with answers at a later date. Such back and forth may continue until all queries are responded to and tax officer has no further questions. 

More recently, the department has been moving towards e-proceedings, which implies that all responses to the inquiries raised can be responded over email, and do not require the assessee to be present in person. This has turned out to be a sincere blessing for all taxpayers, since it saves significant effort, time and paper, and even rules out any chances of harassment of any kind.

What happens after?

It is not necessary that the tax officer may agree with all the explanations furnished by the assessee. In case he is not satisfied, he may make suitable adjustments to the taxable income of the assessee for that year and raise demand for any shortfall in taxes paid, basis such revised income computed by him. 

If the taxpayer does not agree with such assessment, he can approach the higher authorities to appeal against the assessment so completed and the matter can be argued by both parties (taxpayer and tax officer) for adjudication. 

You can learn more about assessment proceedings as part of taxation training given by Super 20 Training Institute in its Advanced Executive of Commerce course.