Basic facts about Accounting
We often ask the companies for their Balance Sheet and they give us a
booklet with a beautiful cover page.
The proper term for this booklet is “Annual Statement of Accounts” not a
Balance Sheet.
This booklet is a combined form of different statements viz. Balance Sheet,
Profit and Loss Accounts, Profit and Loss Appropriation Accounts and Cash
or Fund Flow Statement.
Combinely, they are called Annual Statement of Accounts.
Some facts about Annual Statement of Accounts:
1. It may be for a period of one financial year (Apr-Mar) or may cover
upto 18 month’s period.
2. It may be a consolidated account covering information about more
then one units which are established by the company.
3. Every factory is not a company e.g. “Birla Tyres” at Balasore, Odisha
is not a company. It is a unit of Keshorom Industries Ltd. having its
registered office at Kolkata.
Most Important:
In case of large companies which are listed in stock exchanges (called
as listed companies) shall give you a booklet which provides very less
information. Do not panic. It is not their actual Annual Statement. Those
booklets are called “Abridged Statement of Accounts” which is meant for
distribution among the shareholders. It is not their complete balance sheet. In
such a case ask them for their complete statement. They are bound to
provide you the same.
Advancement of economic and business operations in the developing countries
during the past two decades created several challenges before the economic law enforcing
authorities.
The policy of economic liberalization pursued by the governments resulted in
mushrooming of corporate sector business organizations in the economic scenario.
Multiplicity in the forms of business operations with emergence of new business avenues
like BPOs, software engineering and un-definable business auxiliary and support services
has complicated the method of implementation of business as well as tax laws.
Similarly, the conventional business sectors like manufacturing of goods has also
become complicated due to integration of the corporate operation to multiple numbers of
subsidiaries, allies and branches. Almost all the large and medium scale companies are
now operating in complex financial environment and generating consolidated financial
reports which are beyond the comprehension of the tax authorities.
Since the crown’s share in the form of taxation is indispensable for the healthy
growth of the nation, it may not afford the consequences of improper collection of the
same. Here, we feel the needs of equipping the officers of the taxation department with
proper and effective tools to handle such emerging challenges before them. Artistically
speaking, ‘tax law’ and ‘Knowledge in Accountancy’ are two wings of a taxman.
Through this text, sincere efforts have been taken to find an easier way to give a
simple structural framework to ‘Accountancy’ and to integrate the same to Central Excise
and Service Tax law so that the departmental officers may easily co-ordinate both the
subjects to draw effective and logical inferences from the financial statements of the
companies . METHODOLOGY :
There are two managerial approaches for study of accountancy. One is the ‘top
down’ method and the other is the ‘bottom up’ method. The ‘top down’ method begins
with an overview of the subject without resorting to deep analysis of every segment of
the subject. But in the ‘bottom up’ method, the study shall be started with deep analysis
of each and every segment of the subject and ultimately it shall reach at the climax of the
study.
Because the instant material is prepared for fairly senior and experienced users of
the department, we should adopt ‘top down’ method which may yield maximum results at
a minimum cost of time.
Financial accountancy which is a vast subject ends with financial reporting in the
form of Annual Statement of Accounts or Balance Sheet as we call it.
Financial Accountancy starts with writing of a voucher and makes its journey
through - journal entry - cash book - bank statement - ledgers - trial balance - and
ultimately ends with a Profit & Loss Accounts and a Balance Sheet.
We shall learn to start from a Balance Sheet and verify its relevancy in the context
of the tax laws. Hence, our approach to study shall be quite different from the
methodology being adopted in the educational institutions.
PRESUMPTIONS:
In present days all the companies have computerized their accounting system and
we presume that there is no scope of error in recording of their transactions and ultimate
reflection of the transaction data in their financial report at the end of the year. So we
shall not break our head on the accuracy of the financial accounting records.
Therefore, if their financial accounting records are correct what we shall verify?
There are certain subjects beyond financial accounting which are very important
for us. These subjects are named as :
• Management Accounting
• Financial Management &
• Cost Accounting
The above subjects are separate branches of commerce curriculum which are
being widely applied in theory and practice by the management of large and medium
scale companies to organize as well as to manipulate their financial reports.
Even small scale proprietorship business concerns knowingly or un-knowingly
use the tools of Financial Management to organize their financial and tax liabilities. One
pretty example may best explain this situation: M/s ABC a manufacturer of steel almirahs
shows turnover of ` 3 Cr. in its P&L Account, but never pays excise duty. On being
asked they show that they manufacture and sale agricultural hand tools of ` 2 Cr a year.
They procure raw material which may be used for both the purposes i.e. for
manufacturing almirahs as well as for agricultural hand tools. In real they manufacture
almirahs which attract excise duty @12 %, sales tax @ 13.5% and entry tax @ 1% of its
value. But by adopting this method the unit avoids the entire liability of all the above
taxes including Income tax. This is not a financial accounting decision but an example of
application (obviously mis-application) of the theory of Financial Management.
Please have a print out of this document. It is a part of a series, further materials will be posted separately.
We often ask the companies for their Balance Sheet and they give us a
booklet with a beautiful cover page.
The proper term for this booklet is “Annual Statement of Accounts” not a
Balance Sheet.
This booklet is a combined form of different statements viz. Balance Sheet,
Profit and Loss Accounts, Profit and Loss Appropriation Accounts and Cash
or Fund Flow Statement.
Combinely, they are called Annual Statement of Accounts.
Some facts about Annual Statement of Accounts:
1. It may be for a period of one financial year (Apr-Mar) or may cover
upto 18 month’s period.
2. It may be a consolidated account covering information about more
then one units which are established by the company.
3. Every factory is not a company e.g. “Birla Tyres” at Balasore, Odisha
is not a company. It is a unit of Keshorom Industries Ltd. having its
registered office at Kolkata.
Most Important:
In case of large companies which are listed in stock exchanges (called
as listed companies) shall give you a booklet which provides very less
information. Do not panic. It is not their actual Annual Statement. Those
booklets are called “Abridged Statement of Accounts” which is meant for
distribution among the shareholders. It is not their complete balance sheet. In
such a case ask them for their complete statement. They are bound to
provide you the same.
Advancement of economic and business operations in the developing countries
during the past two decades created several challenges before the economic law enforcing
authorities.
The policy of economic liberalization pursued by the governments resulted in
mushrooming of corporate sector business organizations in the economic scenario.
Multiplicity in the forms of business operations with emergence of new business avenues
like BPOs, software engineering and un-definable business auxiliary and support services
has complicated the method of implementation of business as well as tax laws.
Similarly, the conventional business sectors like manufacturing of goods has also
become complicated due to integration of the corporate operation to multiple numbers of
subsidiaries, allies and branches. Almost all the large and medium scale companies are
now operating in complex financial environment and generating consolidated financial
reports which are beyond the comprehension of the tax authorities.
Since the crown’s share in the form of taxation is indispensable for the healthy
growth of the nation, it may not afford the consequences of improper collection of the
same. Here, we feel the needs of equipping the officers of the taxation department with
proper and effective tools to handle such emerging challenges before them. Artistically
speaking, ‘tax law’ and ‘Knowledge in Accountancy’ are two wings of a taxman.
Through this text, sincere efforts have been taken to find an easier way to give a
simple structural framework to ‘Accountancy’ and to integrate the same to Central Excise
and Service Tax law so that the departmental officers may easily co-ordinate both the
subjects to draw effective and logical inferences from the financial statements of the
companies . METHODOLOGY :
There are two managerial approaches for study of accountancy. One is the ‘top
down’ method and the other is the ‘bottom up’ method. The ‘top down’ method begins
with an overview of the subject without resorting to deep analysis of every segment of
the subject. But in the ‘bottom up’ method, the study shall be started with deep analysis
of each and every segment of the subject and ultimately it shall reach at the climax of the
study.
Because the instant material is prepared for fairly senior and experienced users of
the department, we should adopt ‘top down’ method which may yield maximum results at
a minimum cost of time.
Financial accountancy which is a vast subject ends with financial reporting in the
form of Annual Statement of Accounts or Balance Sheet as we call it.
Financial Accountancy starts with writing of a voucher and makes its journey
through - journal entry - cash book - bank statement - ledgers - trial balance - and
ultimately ends with a Profit & Loss Accounts and a Balance Sheet.
We shall learn to start from a Balance Sheet and verify its relevancy in the context
of the tax laws. Hence, our approach to study shall be quite different from the
methodology being adopted in the educational institutions.
PRESUMPTIONS:
In present days all the companies have computerized their accounting system and
we presume that there is no scope of error in recording of their transactions and ultimate
reflection of the transaction data in their financial report at the end of the year. So we
shall not break our head on the accuracy of the financial accounting records.
Therefore, if their financial accounting records are correct what we shall verify?
There are certain subjects beyond financial accounting which are very important
for us. These subjects are named as :
• Management Accounting
• Financial Management &
• Cost Accounting
The above subjects are separate branches of commerce curriculum which are
being widely applied in theory and practice by the management of large and medium
scale companies to organize as well as to manipulate their financial reports.
Even small scale proprietorship business concerns knowingly or un-knowingly
use the tools of Financial Management to organize their financial and tax liabilities. One
pretty example may best explain this situation: M/s ABC a manufacturer of steel almirahs
shows turnover of ` 3 Cr. in its P&L Account, but never pays excise duty. On being
asked they show that they manufacture and sale agricultural hand tools of ` 2 Cr a year.
They procure raw material which may be used for both the purposes i.e. for
manufacturing almirahs as well as for agricultural hand tools. In real they manufacture
almirahs which attract excise duty @12 %, sales tax @ 13.5% and entry tax @ 1% of its
value. But by adopting this method the unit avoids the entire liability of all the above
taxes including Income tax. This is not a financial accounting decision but an example of
application (obviously mis-application) of the theory of Financial Management.
Please have a print out of this document. It is a part of a series, further materials will be posted separately.
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