Procedure for setting Accounting Standards in India/Standard Setting Process:-
ICAI is the premiere accounting body in India who constituted Accounting Standards Board (ASB) in 1977. Accounting standards are developed by the ASB. The ASB considered the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) while framing Accounting Standards (AS) in India and tried to integrate them
The Procedure of ASB for setting accounting standards in India is defined as:-
first of all, broad areas are to be found out by ASB for formulation of accounting standards.
Study group is constituted by ASB for preparing preliminary drafts. The draft normally includes definitions, objective, scope, recognition and measurement principles.
Consideration and revision of draft, if any,.
Circulation of draft to members of the council and various bodies such as:-
Members of ICAI.
MCA
SEBI
C&AG
CBDT etc. for comments.
Taking into consideration the comments of bodies and meeting with the representatives of the bodies.
Finalisation of exposure draft and issue for public comments.
After consideration of comments received on exposure draft, submit to the council of ICAI for consideration and approval.
The council of ICAI, if necessary, do modification in consultation with ASB.
Before starting a new business, business organization should think about tax provisions and tax incentives from income tax point of view.
Form of Organization:-
The first step to set up a new business is to decide the form of organization, selection of form of organization depends not only financial requirement and resources but also on tax considerations. A new business can be in any of the following forms:-
Sole proprietorship:- Under sole proprietorship, the person who do the business is liable to pay tax, if any, entire income along with other income assesses in the hands of same person. Noallowance and relief would be available in computing income from business and doesnot get deduction of remuneration for rendering of services by him. The cost of doing such type of business is small and all the profit from business goes to proprietor. As far as deduction in concerned, sole proprietor is entitled to get deductions under chapter VIA.
Hindu Undivided Family:- Hindu undivided family’s income is firstly taxable in the hands of family at the rates applicable. After division of income of family among the members, the members of the family would not become liable to tax when they receive any portion of the family’s income as specific exemption granted under section 10(2) of the Income-tax Act, 1961.
Note:-As per section 115BAC, individuals and HUF have an option to pay tax in respect of their total income (other than income chargeable to tax at specialrates).
3. Partnership/LLP:- 30% flat rate is applicable on Firm/LLP, in addition to tax, surcharge would be applicable if the totalincome exceeds the threshold limit and health and educationcess as well. Income of partners received from firm is exempt under section 10(2A).
4. Company:- Company organizes as widely held or closely held company on the basis of ownership and control.
Deemed dividend under section 2(22)(e) and the provisions of section 79 (restriction on carry forward of losses) do not apply to a widely held company. MAT provisions are applicable to companies. As far as tax is concerned, tax incentives available to domestic companies not available to foreign companies.
Advice for readers: for detailed study please refer any Direct Tax Laws’ book
Accounting policies are the specific accounting principles and methods of applying these principlesadopted by the enterprise in the preparation and presentation of financial statements.
Policies are based on accounting concepts, principles and conventions.
Examples:-
Valuation of inventory.
Valuation of investments.
Valuation of fixed assets.
Depreciation methods.
Selection of Accounting Policies:- is an important decision affects the performance and financial position of the enterprise.
There are 3 characteristics which should be taken into consideration for selection and application of accounting policies namely Prudence, Substance over form, and Materiality.
Key Features of Budget 2023-24 from Direct Tax Point of View
Present
Proposal in Budget 2023-24
As per Sec. 115BAC -Tax Regime Rate of Tax : Upto Rs. 2,50,000——————–Nil From Rs. 2,50,001 to Rs. 5,00,000—————- 5% From Rs. 5,00,001 to Rs. 7,50,000—————-10% From Rs. 7,50,001 to Rs. 10,00,000—————15% From Rs. 10,00,001 to Rs. 12,50,000————-20% From Rs. 12,50,001 to Rs. 15,00,000————-25% Above Rs. 15,00,000——————————30%
Rate of Tax:- Upto Rs. 3,00,000———————————-Nil From Rs. 3,00,001 to Rs. 6,00,000—————–5% From Rs. 6,00,001 to Rs. 9,00,000—————-10% From Rs. 9,00,000 to Rs. 12,00,000————–15% From Rs. 12,00,000 to Rs.15,00,000————–20% Above Rs. 15,00,000——————————30%
As per Sec. 87A Rebate of income-tax in case of certain individuals– Resident individual having total income upto Rs. 5 lakh shall be entitled to get a deduction from the amount of income tax of Rs. 12,500 or amount of income tax whichever is lower.
Total Income for rebate of income tax increased from 5 lakh to Rs. 7 lakh (assessees opting for the new tax regime).
Highest surcharge rate on income above Rs. 5 crore to be reduced from 37% to 25% under new tax regime.
As per Sec. 10(10AA), in case of non-government employee received leave encashment at the time of retirement is exempt from tax (max. 3 lakh).
Increasing tax exemption limit to Rs. 25 Lakh on leave encashment. ( This is as per budget not finance bill)
If opt new tax regime (sec. 115BAC) , no deduction of sec 16
Extending standard deduction to new tax regime
The tax regime of Section 115BAC is proposed to be applicable to Association of Persons (AOP)[(other than a co-operative society], Body of Individuals (BOI), and Artificial Juridical Persons (AJP).
Section 80CCH is proposed, deduction shall be equal to the amount of contributions made to the Agniveer Corpus Fund for Agniveers.
Advice-this is subject to change until finance Act 2023
Difference between Hire Purchase and Installment System
Hire Purchase & Installment System:-
Under this system, assets or goods are taken on hire purchase, the purchaser (hire purchaser) gets possession of goods or assets immediately after paying down payment. However, the ownership remains with the Seller (hire vendor) until the buyer pays the full amount.
Installment System:- here, the possession as well as ownership is transferred to the buyer immediately.
Terminology used in Hire Purchase System:-
Cash Price-amount pay at the time of purchase by purchaser directly when purchase in cash.
Hire vendor-who sell the goods to the hire purchaser.
Hire Purchaser-who purchase the goods under hire purchase agreement from hire vendor.
Hire Purchase Installment:-amount pay at the regular interval up to period predefined in agreement.
Down Payment-initial payment made to hire vendor by hire purchaser.
Hire Purchase Price-total amount of asset payable by hire purchaser.
Basis
Hire Purchase
Installment system
Nature
It is an agreement for hire.
It is an agreement of sale.
Parties
Hire Purchaser and Hire Vendor.
Buyer and Seller.
Ownership
Ownership of the goods is transferred at the time of last installment.
ownership of the goods is transferred at the time of sale.
Right to return
The hire purchaser mayreturn the goods.
goods are not returnable.
Right of seller
If the buyer is in default, seller may takepossession of goods.
If the buyer is in default, seller can sue for price.
Risk of loss
The hire purchaser does not bear the risk of loss of goods.
Commodity market is the market where commodities are bought and sold. For example metals & raw material commodities like cotton, pulses etc.
In commodity market, prices get influenced by many factors from monsoon predictions to political decisions.
Multi Commodity Exchange of India Limited (MCX) and the National Commodity & Derivatives Exchange Limited (NCDEX) are the primary commodity trading platforms in India.
Terminology used in Commodity Market:-
Futures Contract:-agreement where one party agrees to take a short position and another party assumes the long position on contracted commodity with the specific quantity, quality, price per unit, and the date.
Settlement:- Close out day of the futures contract.
Margin:- Margin equal to usually 5-15%.
Open:-Opening price of the trade.
Low:- Lowest price in the trading session or day.
High:- Highest price in the trading session or day.
Open Interest:-Number of open positions of contracts.
Short position in a contract:-party who agrees to sell the contracted commodity.
Long position in a contract:- party who agrees to purchase the contracted commodity.
Meaning:- in simple terminology, Debenture is an financial instrument issued by a company under its seal to take debt (loan).
To raise funds, company use debt financing, debenture may simple or naked carrying no charge on asset or mortgage. Mortgage debenture carry either a fixed or a floatingcharge on some or all of the assets of the company.
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.
Features of Debentures:-
It is a documentary evidence of loan.
It is a interest bearing security.
It may or may not a charge on the assets of a company as security.
Principal sum is payable at a predefined future date and interest at a predetermined fixed rate.
It is converted into shares or other debentures.
It is bought and sold through the stock exchange.
Types of Debentures:-
Debentures can be classified on the basis of :-
Security
Convertibility
Permanence
Negotiability
Priority
Security:-
Secured Debentures:-These debentures are secured by charge on assets of the company, floating and fixed. A fixed charge is a mortgage on specific assets. These assets cannot be sold without the consent of the debenture holders. A floating charge generally covers all the assets of the company including future one.
Unsecured Debentures:-Unsecured debentures also known as Naked debentures, these debentures are not secured by any charge upon any assets.
Convertibility:-
Convertible Debentures:- These debentures are fully or partly convertible into equity shares.
Non-Convertible Debentures:-These debentures are not convertible into equity shares.
Permanence:-
Redeemable Debentures:- These debentures are repayable as per the terms.
Irredeemable Debentures:-These debentures are not repayable.
Negotiability:-
Registered Debentures:- These debentures are payable to person whose name with address is recorded in the Register and not easily transferable.
Bearer Debentures:- These debentures are transferable by delivery.
Priority:-
First Mortgage Debentures:- These debentures are payable first out of the property charged.
Second Mortgage Debentures:- These debentures are payable after first mortgage debentures.
Receipts & Payment Account:-This account provides summary of receipts and payments (cash and bank transactions) irrespective of whether related to current, previous and future period or whether transactions are of capital or revenue nature. This account is prepared by non-profit organization during a particular financial period.
Note:-This account does not deal with non-cash transaction like depreciation and nature of this account is of Real A/c
Income & Expenditure Account:- It is a summary of income and expenditure for particular accounting period. It is like profit and loss account. All the revenue items of current period are shown in this account.
Note: This account is prepared on accrual basis and nature of this account is of Nominal account.
Receipts and Payments Account
Income and Expenditure Account
It is just like cash book.
It is like as profit and loss account.
It records both receipts and payment of capital and revenue nature.
it records income and expenditure of revenue nature.
The receipts and payments can be previous and future periods as well.
Income and expenditure items are related to current period only.
This account does not include non-cash item.
This accounts records non cash items.
Opening balance represents cash in hand/cash at bank/overdraft.
There is no opening balance in this account.
The receipts are recorded on debit side and payments are on credit side
Losses & expenses recorded on debit side and income and gains on credit side.
Closing balance represents cash in hand/cash at bank /overdraft at the end.
Balance at the end represents income over expenditure or vice-versa
Goodwill:- Goodwill is the value of reputation of a business firm in respect of profits that will earn in future over and above the normal profit.
Profits over and above the normal profit is termed as super profit. The excess profit may be due to locational advantage, better customer service, quality of goods sold to customers, reputation of the owner of the business and so on.
Goodwillis anintangible asset.
Example:- ABC wants to purchase business of XYZ and the net worth (assets-liabilities) is Rs.100000. ABC is ready to pay 110000 for it, the extra amount i.e. Rs. 10000 is known as goodwill. One of the reason to pay extra amount is capability of business to to earn more profit than normal profit.
Methods of Valuation of Goodwill:-
Average Profit Method:- According to this method, goodwill is valued at agreed number of years’ purchase of average profits.
Note-Average profits will be of last few year.
For averaging the past profit, either simple average or weighted average may be used.
Example- The profits of ABC partnership firm are Rs. 40000 , 30000, 42000, 38000 and 46000. Calculate the value of goodwill on the basis of 3 years’ purchase of the average profits of last 5 years.
Solution- Total profits of 5 years = Rs. (40000+30000+42000+38000+46000)=196000
Average profit will be sum of profits/No. of years
Average profit =Rs. 196000/5 = Rs. 39200
Three years’ purchase of the above mentioned average profit = Rs. 39200*3=Rs. 117600
Hence, value of goodwill = Rs. 117600 (Average profits * No. of years’ purchased).
The above example is based on simple average profits. If there exists an increasing on decreasing trend, then weightage average profits is to used. Weighted average based on specified weights like 1, 2, 3, 4 for respective year’s profit.
Super Profit Method:- According to this method, super profit (Actual profit(maintainable)-Normal profit)) is to taken into consideration for the valuation of goodwill (Super profit*No of years’ purchase).
Normal profit = Normal rate of return* Capital employed.
Example- ABC firm’s capital employed on 31st march 2022 is Rs. 500000 and profits for the last 5 years were 2017–Rs. 40,000: 2018-Rs. 50,000; 2019-Rs. 55,000; 2020- Rs.70,000 and 2021-Rs. 85,000. calculate goodwill based on 3 years purchase of the super profits of the business, given that the normal rate of return is 10%.
Solution- Normal Profits = Firm’s Capital Normal Rate of Return ×100 = Rs. 5,00,000*10/100× = Rs. 50,000
Capitalization of super profit:- In this method, the value of goodwill is calculated by capitalizing the super profit at the normal rate of return. It is calculated as:- Super profit x 100/Normal rate of return
Capitalization Method:-As per this method, the goodwill can be calculated in two ways:
(a) by capitalizing the average profits= Average Profits × 100/Normal Rate of Return
(b) by capitalizing the super profits =
Goodwill =capitalized value of average profits -Net Assets
Net Assets= Total Assets (excluding goodwill) – Outside Liabilities
Commission:- Commission is the amount paid by the consignor to the consignee for the services (selling the consigned goods) rendered.
There are three types of commission:-
Ordinary Commission- is paid by consignor to consignee based on fixed percentage of the gross sales proceeds. This type of commission doesn’t provide protection to the consignor from bad debts.
Del-credere Commission- This is one type of additional commission paid by consignor to consignee for encouraging to make credit sales. This provides protection to the consignor against bad debts.
Over-riding Commission- This is an extra commission paid by the consignor to the consignee to promote sales at higher price then specified when new product is introduced in the market. The calculation off this type of commission is depend on the agreement whether it is calculated on total sales or difference between actual sales price of product and invoice price or any specified.
