Pooja Nahar

Factoring

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Factoring:-

Factoring is one type of financial service in which the business enterprise sells its trade receivables to another party at a discount to meet its working capital requirements.

Parties involved in Factoring:-

  1. The Seller [Client] who sells the goods on credit and raise invoice.
  2. The another party i.e. outside agency called factor.
  3. The buyer who buys the goods.

Note:- Client, customers and factor.

Important Points:-

  1. Seller sells the book debts to outside agency to meet its working capital requirement.
  2. The factor pays the amount after deducting some amount [called commission] to seller.
  3. The factor receives the full bills’ amount from customer.

In India, factoring service are provided by the following bank subsidiaries:-

  • Canbank Factors Ltd.
  • SBI Global Factors Ltd.

Sequence of activities in factoring:-

  • Client [seller] sells the goods to customers on the basis of order.
  • Client deliver the goods to customer with invoice.
  • Client assigns the invoice to factor for payment of invoice at discount.
  • The factor makes payment after deducting discount [commission] to client.
  • The factor recovers the invoice amount from buyer after expiration of credit period and buyer makes payment to factor.

Capital and Revenue Receipts

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Capital and Revenue Receipts and Difference between Capital and Revenue Receipts

Capital Receipts:- Capital receipts are those receipts which are obtained by an entity in other than normal course of business.

Examples:-

  1. Receipts from sale of fixed assets.
  2. Issue of fresh shares.
  3. Sale of Investment.
  4. Capital contribution etc.

Revenue Receipts:- Revenue receipts are those receipts which are obtained in normal course of business.

Examples:-

  1. Receipts from sale of goods and services.
  2. Interest/fees received in the normal course of business.
  3. Revenue earned by any waste or scrap material etc.
  4. Recovery from bad debts.

Difference between Capital and Revenue Receipts

BasisCapital ReceiptsRevenue Receipts
Meaning Receipts which are obtained in other than normal course of business.Receipts which are obtained in normal course of business.
NatureNon-recurring.Recurring.
RecognitionRecognize as not income.Recognize as income.
Affect the operating profitNo.Yes.
Resultcreates liability.doesn’t create liability.
Course of businessOther than normal or regularNormal or regular.
Reflection In Balance Sheet.Income Statement.
ExamplesReceipts from sale of fixed assets, Issue of fresh shares, Sale of Investment. Capital contribution etc.Receipts from sale of goods and services, Interest/fees received in the normal course of business, Revenue earned by any waste or scrap material etc. Recovery from bad debts.

Difference between Financial Accounting and Cost Accounting

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Financial Accounting and Cost Accounting:-

Sr. No.BasisFinancial AccountingCost Accounting
1.MeaningRecording, classifying and summarizing of financial transactions and events.Recording, classifying and summarizing of Cost data.
2.CoversPreparation and interpretation of financial statements and communication to the users of accounts.Preparation of periodical statements and reports for ascertaining cost of production.
3.ObjectiveTo prepare financial statements i.e. profit & loss a/c and balance sheet etc. To ascertain cost of production, reduce the cost, control the cost and prepare cost statements and reports.
4. NeedFinal accounts are prepared as per Companies and Income Tax Act, 1961.Cost accounts are prepared as per the requirement of management.
5.Information TypeQuantitative.Quantitative.
6.PeriodFinancial accounting is done for definite period.No definite period. Cost reports are prepared according to the requirement of management.
7. Analysis of profitReveals the profit of whole business. Reveals the profit of each product, job or process.
8UsersShareholders and stakeholders.Internal management.
9. Stock valuation As per AS-2 stocks are valued at cost or net realizable value whichever is less.Stocks are valued at cost.
10.Relative EfficiencyDo not reveal the relative efficiency of each department. Provide information on the relative efficiencies of various Plant and Machinery.

Cost Control and Cost Reduction

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Difference between Cost Control and Cost Reduction

To maximize the profit is the main concern of any business enterprise that is only possible by decreasing the cost.

Cost Control:- Cost control is the regulation of the cost by setting up the targets whereby actual cost is compared with predetermined cost i.e. standard cost.

Cost Reduction:- Cost reduction is the real and permanent reduction in cost of product or service. This is continuous effort to reduce cost through savings in cost of manufacture, administration and selling and distribution.

Basis Cost ControlCost Reduction
Meaning It is a technique where actual cost is compared with predetermined cost i.e. target or standard cost.It is a technique where continuous effort is made to reduce the cost of product.
NatureCost control is of a temporary nature.Cost reduction is of permanent and real nature.
Emphasis Cost control emphasizes on present and past behaviour of cost. Cost reduction emphasizes on present and future cost.
ControlControl is possible through compliance with standards.Cost is control through examination includes analysis and challenges.
FocusIt focuses on total cost of production.It focuses on per unit of cost of production.
Approach It is Less dynamic approach. It is a fully dynamic approach.
SavingsTemporary savings in cost.Realistic savings in cost.
ApplicabilityLimited applicable.Universally applicable.
Product’s QualityNo guarantee.Qualities and characteristics are retained.
TargetYes.No.
FunctionPreventive.Corrective.

Vostro, Nostro and Loro Accounts

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Vostro, Nostro and Loro Accounts:-

Bank maintains three types of current accounts for quick transfer of funds in foreign currencies. In case of transfer of foreign exchange from one account to another, Vostro, Nostro and Loro accounts are used.

Vostro Account:-

Vostro is an Italian word which literally means “Your“. This account is the account of one country’s bank [foreign bank] with another country’s bank [Indian bank].

Example:-

  1. Account of foreign bank with local bank.
  2. Citibank’s account with State bank of India.
  3. Doha bank maintains an account with Punjab National Bank.

[Your account with us]

Nostro Account:-

Nostro is an Italian word which literally means “Our”. This account is the account which is held by a domestic bank [ex.-Indian bank] with foreign bank [ ex.-bank in Switzerland]. It is also known as “our account with you”.

Here, one country’s bank’s currency account is maintained by the bank in a foreign country is called as Nostro Account.

Example:-

  1. An Indian bank’s account with a bank in Switzerland in Swiss franc.
  2. An Indian bank’s account with bank in USA in US Dollar.

Note:- Account which is Nostro for one bank is Vostro for another.

Loro Account:-

Loro is an Italian word which literally means “Their“. This account is the account where foreign exchange transaction are settled by domestic banks by using the account of third party bank which has a Nostro account. Ex.-ICICI bank’s account with Citibank.

Example:-

If IFCI bank is required to be paid the bill of machinery imported from the USA on behalf of its customers, IFCI bank will approach ICICI bank who has Nostro account with Citibank and ask to settle the invoice on its own behalf.

Here, ICICI bank works as an intermediary between Citibank and IFCI bank.

Difference between PAN, TAN and GSTIN

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Difference between PAN, TAN and GSTIN

Sr. No.BasisPANTANGSTIN
1Full formPermanent Account NumberTax Deduction and Collection Account NumberGoods and Services Tax Identification Number
2What isPAN is a ten-digit unique alphanumeric number.TAN is a ten-digit unique alphanumeric number.GSTIN is a fifteen-digit number and certificate of registration.
3FormatFirst 5 characters are alphabet, next 4 characters are numbers and last character is alphabet. First 4 characters are alphabets, next 5 characters are numbers and last character is alphabet.First 2 characters are numbers, next 5 characters are alphabets, next 4 characters are numbers, twelve character is alphabet, thirteen character is number, fourteenth character is alphabet and last character may be alphabet or number.
4CharactersFirst three characters represent the alphabetic series, Fourth characters represents the status of the PAN holder, fifth character represents the first character of the PAN holder’s last name/surname in
case of an individual. In case of non–individual fifth character represents the first
character of PAN holder’s name, next characters are sequential numbers and last character is an alphabetic check digit.		first three characters represent the code of jurisdiction, fourth character represents the name with initial letter of the name of TAN holder, next 5 characters are numbers and last character is random. First two characters represent State code, next ten characters represent PAN of GSTIN holder, thirteenth character represents the Entity code (depends on number of registration), fourteenth character is (alphabet) by default and last character is check digit.
5IssuerIncome Tax Department.Income Tax Department.GST Authorities.
6Application form49A/49AA49BGST REG-01
7Law requirementSection 139 A of the Income-tax Act, 1961Section 203A of Income-tax Act, 1961Section 22 of CGST Act, 2017
8Application feeRs. 93/864Rs. 65No fee

Commission under Income-tax Act, 1961- Section 194D, 194G and 194H

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TDS Provisions on Commission under Income-tax Act, 1961

  1. Insurance Commission:- Under section 194D of Income-tax Act, 1961, any person responsible for paying to a resident, any income by way of remuneration or reward, commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) shall deduct income-tax at the rate of 5% at the time of payment or at the time of credit of income to the account of the payee whichever is earlier.

Note:- Provided that there shall be no deduction under section 194D, if the aggregate amount of such income credited or paid during the financial year does not exceed Rs. 15000.

Note:- Mode of payment- Cash/Cheque/Draft or any other mode.

2. Commission on Sale of Lottery Tickets:- Under section 194G of Income-tax Act, 1961, any person responsible for paying to any person any income, by way of commission, remuneration or prize on lottery tickets, for stocking, distributing, purchasing or selling lottery tickets shall deduct income-tax at the rate of 5% at the time of payment or at the time of credit of income to the account of the payee whichever is earlier.

Note: Provided that there shall be no deduction under section 194G, if the amount of such income credited or paid does not exceed Rs. 15000.

Note:- Mode of payment- Cash/Cheque/Draft or any other mode.

Commission or Brokerage:-

Under section 194H of Income-tax Act, 1961, any person (other than an individual or HUF) who is responsible for paying to a resident, any income by way of commission (other than insurance commission of section 194D) or brokerage, shall deduct income-tax at the rate of 5% at the time of payment or at the time of credit of income to the account of the payee whichever is earlier.

Note:- Provided that there shall be no deduction under section 194H, if the aggregate amount of such income credited or paid during the financial year does not exceed Rs. 15000.

Note:- Provided further that an individual or HUF whose total sales, gross receipts or turnover from the business or profession exceed [Rs. 1 crore in case of business or Rs. 50 lakhs in case of profession] during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid, shall deduct income-tax at the rate of 5% at the time of payment or at the time of credit of income to the account of the payee whichever is earlier.

Note:- Provided that there shall be no deduction under section 194H, if any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.

  • Commission or brokerage” includes any payment received or receivable, by a person acting on behalf of another person for services rendered (other than professional services).
  • Professional services includes legal, medical, engineering or architectural or accountancy or technical consultancy or interior decoration or such other profession [notified for the purposes of section 44AA.
  • Account includes Suspense account as well.

Note:- Mode of payment- Cash/Cheque/Draft or any other mode.

Forms of Business Organization

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Forms of Business Organization

The following are the forms of organization:-

Sole Proprietorship:-

L.H. Haney:-The individual proprietorship is the form of business organization at the head of
which stands an individual as one who is responsible, who directs its operations
and who alone runs the risk of failure.

  • This is one of the best popular small forms of business. As the name suggests, sole proprietor, here, the word sole implies only, and proprietor refers to owner. Hence, a sole proprietor is the single person who is owner of a business.
  • In such a form of business organization, a business is owned, controlled and managed by an individual who owns the business, and all profits and risk will be borne by that individual. In India, high proportion of micro and small businesses are unregistered.
  • In a modern economy where the best financial system exists, it is often possible to obtain micro–finance and bank finance for this type of small business.
  • Here, the owner of the business is personally responsible for the debts, and if there is a shortfall to meet liabilities or debts,  if any, the owner’s personal assets could be used for the repayment of debts.

Important Points:-

  • Sole proprietor is considered as one’s own boss.
  • Sole proprietor is regarded as an economic hero.
  • Autonomous power, unlimited liability and bearing capacity of risk.
  • No separate entity, there is no difference between owner and business.

Hindu Undivided family

Joint Hindu Family can also do business in India. HUF (Hindu Undivided Family) is formed automatically in a Hindu Family which consists of persons lineally descended from a common ancestor, including their wives and unmarried daughters. Joint Hindu Family Business or HUF business is a separate entity from Income Tax point of view. 

Important Points:-

  • It is governed by Hindu Succession Act, 1956.
  • Three successive generations are considered HUF (Hindu Undivided Family).
  • HUF can have income from five heads of income except income from salary.
  • Karta is the person who is the eldest member of the family.
  • Family members are co-owners (also known as co-parceners) by birth.
  • HUF includes Buddhist, Jain and Sikh families.
  • Karta has unlimited liability.
  • Married daughter has equal rights in property of a Joint Hindu Family.

Partnership

The Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed
to share the profit of the business carried on by all or any one of them acting for all.

Important Points:-

  • Minimum two or more persons are required to form a partnership.
  • It is an agreement enforceable by law.
  • The essence of partnership is partnership deed.
  • Partnership is governed by the Indian Partnership Act, 1932.
  • Ownership is not easily transferable.
  • Liability of partners is unlimited.

Limited Liability Partnership (LLP)

It is registered under the Limited Liability Partnership Act. 2009. Here, the liability of the partners is limited. LLP is a separate entity.

Important Points:-

  • It is a legal entity.
  • Entity is different from partners.
  • Partners have limited liability.
  • ROC is the administrative body.   
  • There is no limit on maximum no. of partners.

Company

According to Prof. Haney – A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.

Memorandum of Association (MOA) and Article of Association (AOA) are important documents of company. There are various types of companies.

Difference between Business, Profession and Employment

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Difference between Business, Profession and Employment

Sr. NoBasisBusinessProfessionEmployment
1MeaningBusiness includes trade and commerce.Profession includes rendering of services based on personalized expert service under code of conduct.Employment includes rendering of services under a contract of employment or rules of service.
2Code of ConductDoes not require.Require (professional codes).Require (employer’s codes).
3 Mode of establishmentEntrepreneur’s decision and other legal formalities, if necessaryMembership of a professional
body and certificate of practice.		Appointment letter and service agreement.
4 QualificationsNo minimum qualification is required. Professional qualification & experience from professional body is necessary.Require as prescribed by the employer.
5Returnprofit.Professional fee.Wages & Salaries.
6InvestmentRequire as per size and nature of business.Limited requirement for set up of office/clinic etc.None.
7RiskHigh.Low.Very low.
8Freedom/AutonomyFull.Quite a bit.Not much.
9Transfer of interestPossible with few requirements.Not possible.Not possible.
10StabilityCertain.Quite certain.Quite certain.
11exampleFactory, Company, Shop and so on. Accountancy, Legal and Medical and so on. Companies, Government departments, PSUs, Banks etc.

Deduction from Rental Income

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Deduction from Rental Income| Deduction from Annual Value of House Property.

Rental Income

Rental income from a property is chargeable to tax under the head Income from house property.

Meaning of property

Property should consist of any building or land appurtenant (means land connected with the building like garden, garage etc.) thereto.

Note:- Building includes residential building, factory buildings, offices, shops, godowns and commercial premises.

Deduction from Annual Value of House Property

Deduction under section 24:-

Under section 24(a) – Flat deduction i.e., 30% of Net Asset Value (NAV).

Note:- The above deduction (30% of NAV) will not be available if annual value of house property is Nil.

Note:- in case of self-occupied property and property held as stock in trade and property is not let-out, upto 2 years from the end of the financial year in which certificate of completion of construction of the property is obtained from the competent authority, the annual value of house property is Nil.

Under section 24(b) – Interest on borrowed capital.

  • Deduction can be claimed of Interest on loans borrowed for the purpose of acquisition, construction, renovation, repair or reconstruction.

Note:-Interest on fresh loan taken for repayment of previous loan is also allowed as deduction.

Note 1:- It also includes interest for pre-construction period. Pre-construction period is the period prior to the previous year in which property has been acquired or constructed. Interest for pre-construction period can be claimed as deduction over a period of 5 years in equal installments from the year in which construction is completed or property is acquired.

Note 2:- Full interest of the year in which construction is completed or property is acquired can be claimed.

Special Note:-There is limit on deduction of interest in case of self–occupied property where the annual value of property is Nil.

Sr. NoConditionsDeduction
11. If loan was taken on or after 01.04.1999 for construction or acquisition of property and construction of property is completed within 5 years from the end of the financial year in which loan was taken.
2. furnish Certificate of payment of interest received from borrower.
Maximum Rs. 200000/-
2If loan was taken on or after 01.04.1999 for repair, renovation or reconstruction of property.Maximum Rs. 30000/-
3.If loan was taken before 01.04.1999 for acquisition, construction, repair, renovation or reconstruction. Maximum Rs. 30000/-

Imp. Note:- This is for maximum 2 self-occupied property and deduction of interest under point 1 and 3 as mentioned above cannot exceed Rs. 200000/-

Key Points:-

  • Rental income is charged to tax in the hands of owner of the property.
  • Rent received by tenant from sub–letting is taxable under the head Income from other sources or profits and gains from business or profession.
  • Composite rent includes rent of building and other assets/services/facilities.
  • GAV is higher of expected rent and actual rent [expected rent is the higher of fair rent and municipal value, but restricted to standard rent.
  • If municipal taxes due but not paid by owner then it cannot be deducted.
  • If interest is paid on loan taken from relatives and friends for acquisition, construction, renewal, repair or reconstruction then can be claimed as deduction.
  • Limit is Rs. 200000/- or Rs. 30000/- is applicable in case of self-occupied property.
  • Self-occupied property means property which is occupied throughout the year for own residence.
  • Person can claim two properties as self-occupied property.
  • Unrealized rent is charged to tax after deduction of sec. 24(a).