Isn’t it a good feeling when everything in your house and office is in the right place and order? You can find the things whenever you need them. Plenty of time is saved and you can easily focus on big and vital things.
While a messy place? ewww! It makes you all lethargic, doesn’t let you focus, keep you in a web of clutter and you just cannot understand what you are doing and why.
Accounting keeps your finances and money in the order. It sorts out your messy environment and gives you the report of revenue you made, expenditure you incurred, profits/losses you made and help you locate the reason so that you can take the best decision for your business. Accounting is awesome for you business!
It is much more than knowing true and fair position of the business. It is also a legal requirement.
Importance of Accounting
- Analysis/Decision Making: It helps in taking important decisions based on the reports on profitability, liquidity, efficiency, etc. Without proper accounts, management would be acting in blindness.
- Record Keeping: Records are maintained for taking future actions. Government uses records of companies to make monetary and industrial policies.
- Fraud detection: When records are maintained, tracking the events is easier. It helps in establishing good internal control, which in turn helps you detect and check the frauds taken place.
- Raising funds: To raise funds from investors or bankers, you need to establish that you are able to generate enough revenues to yield returns to investors and banks. This can be established only when you have a maintined record to prove so. Accounting serves this purpose.
Types of Accounting
There are two types of accounting- Cash basis and Accrual basis.
The Cash basis of accounting recognizes and records the financial transaction when cash is exchanged between parties. Accrual accounting recognizes and records transactions, as and when they occur, regardless of cash exchange.
Example: Your company made a sales of Rs 50,000 but, cash will be received after 15 days. The transaction will be recorded today under the accrual method. But, under cash method, it will be recorded only when cash is received against the sale. Smaller businesses generally use cash basis of accounting, as it is an easier method.
Compulsory maintenance of books of accounts under Income Tax Act
Are you covered under this? Let’s find out
- Section 44AA of Income Tax Act has made it compulsory for certain specified professionals to maintain books of accounts and other documents for Income Tax purpose, if:
- Yearly gross receipts of the profession exceeded Rs 1,50,000 per annum in all the three years immediately preceeding the previous year or
- In case of first year of business, gross receipts are likely to exceed Rs 1,50,000.
- In case, gross receipts of specified professionals are more than Rs 25 lakhs in the previous financial year, tax audit by a Chartered Accountant of financial records is mandatory.
These specified professions are:
- Technical Consultancy
- Interior Decoration
- Authorised Representative
- Film Artist
- Company Secretary
- Information Technology
These specified professionals have a technical degree and render services. They are non traders.
Don’t forget: If in any one year, your income goes below the threshold limit of Rs 1,50,000, you are not required to maintain books of accounts.
- Books of accounts are to be maintained by persons other than those mentioned above if:
- His income (profit) from business or profession exceed Rs 1,20,000 per annum or his sales/gross receipts exceed Rs 10 lakhs in any of the three preceeding years.
- In case of first year of business, if income is likely to exceed Rs 1,20,000 per annum or his sales/gross receipts likely to exceed Rs 10 lakh.
- In case the gross receipts/ turnover/total sale of non specified professionals is more than Rs 1 crore in the previous financial year, tax audit by a Chartered Accountant of financial records is compulsory.
Don’t forget: If in any one year, your income goes below the threshold limit, you are still required to maintain books of accounts, unless sales/income falls for three years continuously.
- Presumptive Income Scheme: Persons filing their return of income under the presumptive income scheme are not required to compulsorily maintain books of accounts. However, if they claim their profits to be less than deemed profits under the scheme, then they need to maintain the books of accounts.
Presumptive Income Scheme is a scheme, wherein profits declared in tax return are computed as a percentage of sales. Example: Under section 44AD of the Income Tax Act, assessee can declare his profits as 8% of the total revenue, if his gross turnover does not exceed the threshold limit of Rs 1 crore.
What books of accounts to be maintained?
Every possible document in relation to business is required to be maintained:
- Cash book/ledger/journal
- Inventory records
- Bank Statements
- Original Bills
- Receipts/counterfoils of sales
- Vouchers for payments
Books of accounts can be maintained both manually as well as in electronic form.