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Accounting and Bookkeeping: Overview

Introduction

Keeping complete records of financial transactions is essential for success in the current business world. Accounting and bookkeeping are essential tasks in India that support businesses in maintaining financial stability and making sound judgements. This blog post will examine accounting and bookkeeping in India in further detail, explaining what they are and their significance.

What is Accounting?

 Recording, categorising, and summarising financial transactions is the process of accounting, which provides relevant data for company decisions. It entails applying a set of uniform guidelines known as Generally Accepted Accounting Principles (GAAP) to guarantee accurate and consistent financial reporting.

The Institute of Chartered Accountants of India (ICAI), which establishes standards for accounting procedures and offers instructions for creating financial statements, oversees accounting in India. Companies must also abide by the requirements of the Companies Act, which establishes the guidelines for financial reporting.

What is Bookkeeping?

Keeping track of all financial transactions in a business is known as bookkeeping. It is a crucial step in the accounting process and entails methodically recording transactions. Financial statements, including balance sheets, income statements, and cash flow statements, are produced using the data entered throughout the bookkeeping process.

In India, a group of experts, including accountants, bookkeepers, and data entry specialists, often handle bookkeeping. They are responsible for ensuring that every transaction is appropriately recorded and that the financial records are current.

Why are bookkeeping and accounting essential in India?

The Companies Act, the Income Tax Act, and the Goods and Services Tax (GST) Act are just a few of the laws and regulations that businesses in India are required to abide by. Companies can comply with these standards and avoid penalties by maintaining accurate accounting and bookkeeping.

Decision Making: Accurate financial information is crucial for making informed decisions. Businesses may assess their financial performance, pinpoint opportunities for development, and create well-informed strategies using the data produced by their accounting and bookkeeping procedures.

Access to Finance: Businesses must present correct financial information to banks or other financial organisations before receiving financing. For businesses seeking finance, accurate accounting and bookkeeping are essential since it gives lenders a clear picture of the business’s financial position.

Better Cash Flow Management: Companies may manage their cash flow more efficiently with the use of accurate accounting and bookkeeping. Companies can better manage their cash flow by keeping track of their financial transactions and identifying areas where spending has to be increased or decreased.

Accrual concept of Accounting

 Either the accrual basis or the cash basis can be used for financial accounting. The accrual basis is widely used. An organisation might also combine the two. Only when a transaction generates a cash flow must it be reported according to the cash basis of accounting. However, a transaction is recorded as it happens and revenue is recognised under accrual basis. Once a company decides on a technique, such as cash or accrual, it should abide with it.

The journal

 The journal is called the book of original entry. It is the location where a company first records its transactions in chronological order. A journal may be physical (such as a book or diary) or electronic (stored as spreadsheets, or data in accounting software). It details each transaction’s date, the accounts that were credited or debited, and the exact amount involved. Each journal entry affects the ledger even if it is not customary to review the journal’s balance at the end of the fiscal year. The ledger must be balanced, as we will see, therefore keeping an accurate notebook is a desirable habit to develop. For double-entry bookkeeping, use this form.

The ledger

A ledger is a record of financial transactions. It also goes by the name “book of second entry.” Transactions are categorised into distinct accounts after being recorded in a journal, and then they are moved into the ledger. Assets, Liabilities, Equity, Income, and Expenses are the accounts listed in the order that they appear in the records. The ledger can be a physical document or an electronic spreadsheet, just like the journal.

A chart of accounts, which is a list of all the names and numbers of accounts in the ledger, can be found in a ledger. The chart typically follows the transcribed records’ account-by-account arrangement.

Ledgers must always be balanced at the conclusion of the fiscal year because, unlike the journal, they are audited.

How are financial statements prepared?

 Each company’s financial statements will adhere to a standard format and conventional accounting principles in that country or region. This makes comparisons of the financial statements and financial positions of various organisations easier and more consistent. The accounting standards that an organisation adheres to depend on the regional regulatory and reporting standards as well as the target market that a corporation serves.

Indian businesses adhere to Indian Accounting Standards, US-based businesses adhere to Generally Accepted Accounting Principles (GAAP), and businesses with global exposure adhere to International Financial Reporting Standards (IFRS). The guidelines published by the various boards not only help a company report transactions accurately, but they also provide clarifications for tricky transactions that firms must deal with.

The standards guarantee uniform accounting. These standards are periodically updated to reflect the intricacies of business.

Presentation of financial statements

 The reporting of transactions that have taken place during the financial period is known as financial accounting. Any time frame might be a financial period. Year-end financial statements, however, are often created for a whole year.

A financial year in India runs from April 1 to March 31. Some businesses base their reporting on the calendar year. The organisation will present its financial statements, also known as financial reporting, at the conclusion of the specified time.

The financial statements report on five main aspects of a business.

  1. Revenue
  2. Expense
  3. Asset
  4. Liabilities
  5. Equity

The income statement accounts for sales and expenses, whereas the balance sheet reports on assets, liabilities, and equity.

Income Statement

The revenue and expenses for the financial period are listed in the income statement. It lists every dollar of income and expense for that time period. It displays the organization’s operational wellness and includes the details required for tax calculation.

Balance Sheet

 The balance sheet is a tool used to assess the company’s financial standing. It keeps track of an organization’s assets, liabilities, and equity. The review of the balance sheet enables an investor to determine the company’s value. It is also used to evaluate the organization’s credibility.

Cash Flow statement

 The following three categories are used to provide the cash flow statement, which an organisation also prepares in addition to the statements above and which indicates the movement of cash:

Cash Flow from operating activities

Cash Flow from investing activities

Cash Flows from financing activities

Computation of income

The term “computation of total income” refers to the organised presentation of all incomes, exemptions, rebates, reliefs, deductions, and tax calculations. While there is no standard format for the same, in general the following factors are taken into account when calculating total income: the assessee’s personal information (Name, Father’s Name, Address, Contact Information, etc.), bank account information, income information, calculation of taxes and taxes paid information.

Computation of income is an essential aspect of financial management. It is the process of calculating the amount of money a person or organization earns, which is subject to taxation. This article aims to provide an overview of the concept of computation of income, its importance, and how to calculate it.

Firstly, the computation of income involves determining the total amount of revenue earned by an individual or an organization within a given period. This amount is derived from various sources such as salaries, wages, business profits, rental income, capital gains, and other investments. In addition, deductions such as taxes, insurance, and other allowable expenses are subtracted from the total revenue to arrive at the net income.

It is essential to compute the income accurately as it affects the amount of tax that an individual or organization pays. Incorrect calculations may result in underpaying or overpaying taxes, which can lead to legal consequences.

The process of computing income starts by calculating the gross income. This includes all sources of income such as wages, bonuses, commissions, and any other forms of compensation. It is important to note that some types of income, such as gifts, inheritances, and certain types of insurance proceeds, are not subject to taxation and should not be included in the gross income.

After calculating the gross income, deductions such as taxes, contributions to retirement accounts, and other allowable expenses are subtracted to arrive at the taxable income. The taxable income is the amount on which taxes are levied. It is important to note that the tax rates vary depending on the level of taxable income, with higher income earners being subject to higher tax rates.

In summary, the computation of income is a crucial aspect of financial management, and it involves determining the total revenue earned by an individual or organization, subtracting allowable deductions, and arriving at the taxable income. Accurate computation of income is important to ensure compliance with tax laws and to avoid legal consequences.

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