Published on February 24, 2014
SRGGLOBAL PRESENTS ACCOUNTING FOR START UPS FEBRUARY 23, 2014 SANDEEP GUPTA MANAGING PARTNER
AGENDA What is Accounting Accounting Rules and outcomes Balance Sheet Profit and Loss account Cash Flow statement Important Ratios Case Study Compliances
What is Accounting?? Accounting is the process of analyzing and reporting on the financial transactions of a person or an organization Why do we need it?? • • • • • To understand the financial health of your business To save you money in the long term To help secure additional funding in the future To achieve long-term goals Statutory obligations Dual Entry Concept – Each transaction has a dual impact – one debit & one credit.
Accounting Rules and Outcome Debit vs. Credit Debit what comes IN, credit what goes OUT Debit all expenses, credit all Incomes Debit all Assets, credit all Liabilities Key Outcomes Vouchers – Journal, Bank, Cash, receipts, purchase, sales, inventory Books – Cash Book, Bank Book, Purchase books, sales books Ledger – General Ledger, Party Ledger etc. Reports – Balance Sheet, Profit & Loss, Cash flow etc.
Balance Sheet – Company’s Financial health A report showing summary of your financial position as on a date For companies – driven by The Companies Act, 1956 recently replaced by The Companies Act, 2013 Accounting Standards as issued by The Institute of Chartered Accountants of India Important terms Assets : Your thing—what you own. Key Asset classifications are: Fixed Assets Investments Current Assets Liabilities : What your business owes. Key liability classifications are: Owner’s kitty - Equity Share Capital, Reserve & Surplus Loans – Secured & Unsecured Current Liabilities
Balance Sheet As At …………………. Liabilities Amount Assets Equity Share Capital Fixed Assets (net of depreciation) Reserve & Surplus (Including balance of Profit & Loss A/c) Investments Loans - Secured & Unsecured Current Assets Current Liabilities Amount Other Assets Miscellaneous Expenses to the extent not written off Total XXX Total XXX
What BS tells you Summary of assets and claims against those assets Information on Companies ability to pay its debts How the Company is positioned to carry on its day to day business – Cash vs Accrual
Projecting BS Projecting your balance sheet can be quite a complex accounting problem. The desired result is not a perfect forecast, but rather a thoughtful plan detailing what additional resources will be needed by the company, when and where they will be needed, and how they will be financed. Using your last historical balance sheet as a starting point, project what your balance sheet will look like at the end of the 12, 24 -60 month period covered in your Profit & Loss and Cash Flow forecasts. How will the year's operations affect assets, debts and owners’ equity? For example, if you are planning significant sales growth in the coming year, go through the balance sheet item by item and think about the probably effects of assets. Ex. ASSETS: Inventory and Accounts Receivable will have to grow. New equipment may be needed for increased production. You may draw down on cash to finance some of this. Now, since a balance sheet must balance, you need to consider the effects on the other half of the statement, liabilities and equity. Ex. LIABILITIES & EQUITY: Some of the growth may be financed by profits retained in the business as Retained Earnings. Your Profit & Loss Projection will tell you how much might be available from that source. Funds may be contributed by the owners through contributions of more Invested Capital or loans to the company (Notes Payable to Stockholders). Suppliers may provide some of the financing via increased Accounts Payable. The rest will have to be financed by borrowing, which can be: Short term loans (due within 12 months) such as a line of credit or by Long Term Debt (maturity greater than 12 months).
Accounting Policies Fixed Assets Tangibles 2. Intangibles – acquired/ created/ controlled 3. Depreciation or Amortization 4. Capital work in progress 5. Impairment of fixed assets Expenditure on new projects and expansion Inventories 1.
Profit and Loss Account – Performance and achievements A report card for business’s state of affairs for a particular period For companies – driven by The Companies Act, 1956 recently replaced by The Companies Act, 2013 Accounting Standards as issued by The Institute of Chartered Accountants of India Important terms Income : Revenue what you receive or accrues to your business. Key Income classifications are: Sales Non Operational Income Expenses : Expenses your business commits/pays. Key Expense classifications are: Purchases, Direct Expenses Sales & Administrative Expenses Financial Expenses Depreciation
Profit & Loss for the period ending …………………. Expenses Amount Income Purchases Sales Direct Expenses Amount Non Operational Income Sales & Administrative Expenses Finacial Expenses Loss, if applicable Depreciation Profit, if applicable Less: Tax Distributable Profit Total YYY Total YYY
Cash Flow Statement Shows your cash movement for a particular period Schedule VI of Companies Act Various ways – Direct, Indirect Important terms: Cash Inflow/Outflow from operating activities Cash Inflow/Outflow from Investment activities Cash Inflow/Outflow from financing activities
Cash Flow for the period PARTICULARS Profit after Tax Adjustments for: Depreciation and Amortisation Dividends (Payout & Tax) Operating Profit before Working Capital Charges Adjustments for: (Increase) / Decrease in Sundry Debtors (Increase) / Decrease in Loans & Advances Increase / (Decrease) in Sundry Creditors Increase / (Decrease) in Provisions Net Cash from Operating Activities Cash Flow from Investing Activities (Purchase)/ Sale of Fixed Assets (Purchase)/ Sale of License / Brand Building (Increase) / Decrease in Investments Other Income Net Cash from Investing Activities Cash Flow from Financing Activities Increase in Share Capital Proceeds from / (repayment) of secured loans Proceeds from / (repayment) of unsecured loans Interest Expenses Net Cash from Financing Activities Net Increase in Cash & Cash Equivalents Opening Cash Balance Closing Cash Balance Amount
Important Ratios Current Ratio – Current assets / Current liabilities Return on Equity –Net income / Average shareholders equity Debt Equity Ratio – Total liabilities / Shareholders equity Debt Service Coverage Ratio – Operating cash flow / Total debt service (annual) Price Earning Ratio - Price per share / Earning per share (EPS) Market Capitalization – Market value of companies outstanding shares Break Even point Cash Burn
How do I know how I am doing You have positive cash flow You have accurate records You are paying taxes, loans and expenses on time You have an accurate idea of Income and expense You are hitting your targets You are paying yourself
Case Study Mr. A started his business and introduced capital of Rs 1 lac. During the year ending 31st March 13, he did following transactions: a) b) c) d) e) f) g) h) i) j) Sales of Rs 4 lacs Purchases of Rs 3 lacs Incurred direct expenses of Rs 25000 Sales & administrative expenses of Rs 30000 Purchased fixed assets of Rs 50000 Depreciation on fixed assets of Rs 5000 Debtors as on 31st March 13 was Rs 25000 Creditors as on 31st March was Rs 10000 Borrowed unsecured loan of Rs 100000 Paid interest and bank charges of Rs 10000
Balance Sheet As At 31st March 2013 Liabilities Equity Share Capital Reserve & Surplus (Including credit balance of Profit & Loss A/c) Loans - Unsecured Current Liabilities Amount Assets Fixed Assets (net of 100000 depreciation) Amount 45000 21000 Investments 0 100000 Current Assets 10000 -Debtors - Cash and Bank balance 25000 161000 Miscellaneous Expenses to the extent not written off Total 231000 Total 0 231000
Profit & Loss for the year ending 31st March 2013 Expenses Amount Income Amount Purchases 300,000 Sales 400,000 Direct Expenses 25,000 Sales & Administrative Expenses 30,000 Finacial Expenses 10,000 Depreciation 5,000 Profit before tax 30,000 Less: Tax (assuming 30%) Profit after tax (transfer to Capital A/c) 9,000 Total 21,000 400,000 Total 400,000
Cash Flow Statement As At 31st March 2013 PARTICULARS Profit after Tax Adjustments for: Depreciation and Amortisation As At 31st March 2013 21000 5000 Operating Profit before Working Capital Charges Adjustments for: (Increase) / Decrease in Sundry Debtors Increase / (Decrease) in Sundry Creditors Net Cash from Operating Activities - A (25000) 10000 11000 Cash Flow from Investing Activities (Purchase)/ Sale of Fixed Assets (Increase) / Decrease in Investments Net Cash from Investing Activities - B (50000) 0 (50000) Cash Flow from Financing Activities Increase in Share Capital 100000 Proceeds from / (repayment) of unsecured loans Net Cash from Financing Activities - C 100000 200000 Net Increase in Cash & Cash Equivalents Opening Cash Balance Closing Cash Balance (A+B+C) 0 161000
Compliance Framework • New Company – Local Laws – Income Tax / withholding Tax / Wealth Tax – Service Tax – Company Law – Exchange Control – Labor Regulations
CENTRE STATE LOCAL 1.Direct Tax 2.Exchange Control 3.Company Law 4. Customs 5..Excise 6.Service Tax 7.Labour Regulations 1. CST / VAT 2. GST (PROPOSED) 3. Entry Tax 4. Stamp Duty 1. Octroi 2. Municipal Tax 3. Lease Tax 4. Professional Tax
Regulation Manufacturing Trading Service Direct Tax • • • Exchange Control • • • Company Law • • • Customs • • Excise • • Service Tax Labor Regulations • • • • CST / VAT Stamp Duty • • • Octroi • • Entry Tax • • Lease Tax • • • Municipal Tax • • • Professional Tax • • •
Taxes • • • DIRECT – Income – Wealth INDIRECT – Service – CST / VAT / Lease – Customs – Excise LOCAL – Octroi – Municipal – Stamp Duty – Professional
INCOME TAX • Applicability – All Corporates – All individuals having income exceeding taxable limit, including expat • Compliance – Obtaining Permanent Account Number (PAN) – Deposit advance tax quarterly – Tax Audit - if gross turnover exceeds INR 100 million – File Annual Return of Income – Global income of expat to be taxed subject to DTAA provisions.
Personal Income Tax INCOME RANGE (INR) RATE(%) UPTO 200,000 NIL 200,001-500,000 10 500,001-10,00,000 20 10,00,001 and above 30
Corporate Tax CATEGORY RATE (%) DOMESTIC 30 1 FOREIGN 40 2 1 Surcharge at 10 per cent when income exceeds Rs. 10,000,000 2 Surcharge at 2.5 per cent
ADVANCE TAX MECHANISM 1ST INSTALLMENT 15TH JUNE 15% 15TH SEPTEMBER 45% 15TH DECEMBER 75% 15TH / 31ST MARCH 100% 2ND INSTALLMENT 3RD INSTALLMENT FINAL INSTALLMENT
WITHHOLDING TAX • APPLICABILITY – Salaries of Expat, local employees – Fee for Professional / Technical Services – Payments to Contractors Rent – Payments to non-residents • COMPLIANCE – Obtaining Tax Deduction Account Number – Deposit on a monthly basis – File Quarterly Returns – Issue Withholding Tax certificate quarterly.
Withholding Tax Rates NATURE OF PAYMENT CORPOR INDIVID ATES UALS Contractual 2 1 Lease – Real Estate 10 10 Lease – Equipment 2 2 Professional / Technical 10 10 Commission / Brokerage 5 5 Non – Resident As per As per domestic domestic laws / laws / DTAA DTAA
WHT compliance dates DUE DATES OF DEPOSIT OF TAX WITHHELD DUE DATE OF FILING OF QUARTERLY RETURN 7TH OF SUCCEEDING MONTH QUARTER 1 – 15TH JULY FOR 31ST MARCH DUE DATE IS 31ST MAY QUARTER 2 – 15TH OCTOBER QUARTER 3 – 15TH JANUARY QUARTER 4 – 15TH JUNE
TRANSFER PRICING • Arms length transaction between associated enterprises • Transfer pricing study • Transfer pricing report • Transfer pricing report with annual return of income tax
TRANSFER PRICING • Associated Enterprises Participation in management or capital or control Shareholding carrying 26% or more voting rights (directly or indirectly) Providing loan constituting 51% or more of the book value of the total assets Providing guarantee of 10% or more of total borrowings Appointing more than half of the board of directors or one or more executive directors Providing intangibles on which the business is wholly dependent
WEALTH TAX • Applicability – Wealth exceeding taxable limit of INR 3 million ($ 60 K) • Compliance – Obtaining Permanent Account Number (PAN) – Deposit wealth tax – File Annual Return of Wealth
Indirect Taxes • Customs Duty – On imports of goods • Excise Duty – On Goods manufactured • Goods Tax (Sales Tax / VAT) – On Sale / purchase of goods • Service Tax – On Services
SERVICE TAX • Applicability – Providing taxable service – Receipt of service from non-resident under reverse charge • Compliance – Obtaining Service Tax Registration Number – centralized or decentralized – Computation of CENVAT credit for input services – Deposit service tax monthly – File Half yearly return of Service Tax
SERVICE TAX • Registration with Service Tax Authorities –Single / • • • • Multi-location Deposit of service tax on a monthly basis Filing of half-yearly returns Input credit mechanism Reverse charge implications on certain payments
SERVICE TAX DUE DATE OF DEPOSIT OF SERVICE TAX DUE DATE OF FILING OF BIANNUAL RETURN 5th of succeeding month 25th Octorber For March Due Date is 31st March 25th April
Secretarial • Applicability – All Corporates – No Threshold for exemptions • Compliance – Registration of company with Registrar of Companies of relevant jurisdiction – Director’s Identification Number (DIN) – Digital Signature Certificate (DSC) – Board Meetings / Shareholders’ Meetings – Annual Return – Financials to be audited – Filing of forms for specific events
COMPANY LAW • • • • • Maintenance of books of account Audit Board Meetings Shareholders’ Meetings Filing information with the Company Law Authorities • Accounting Year • Indian GAAP/ IFRS • Consolidation
COMPANY LAW – Specific Issues • Minimum 2 shareholders -concept of single • • • • shareholder company proposed Both to be non-resident corporate entities for the company to be a private company [ S. 4(7) ] Board Meetings to be held quarterly –anywhere in the world. Minimum 2 Directors to be physically present Shareholders’Meetings (AGM) to be held annually in the city where Registered Office is located Companies having a paid up Capital of INR 50 million or more to appoint a full time Company Secretary
Exchange Control • Applicability – – – – – – Subsidiary of foreign company Overseas receipts / remittances External Commercial Borrowings (ECB) Royalty / Fee for technical services Fee for use of Brand name Current Account / Capital Account Transactions • Compliance – – – – – RBI intimation through authorized dealer For overseas receipts Filing of FC-GPR/ FC-TR Certification before any remittance Overseas Prior permission for ECB under approval route and filing of return Prior permissions for Current and Capital account transactions
PROVIDENT FUNDS • Applicability – If number of employees equal to or greater than 20 – Special provisions for Expatriate Employee • Compliance – Registration with Provident Fund Commissioner of – – – – relevant jurisdiction. Employee to contribute 12% of Basic Salary – equal share by Employer Monthly deposit Monthly / Annual returns to be filed Mandatory for International workers
Local Laws • Shop & Establishment Act • Professional Tax
International Workers • Employment Contract • Employment VISA • Registration with FRRO/ Annual Renewals • Registration with the tax authorities • Global income of expat to be taxed subject to DTAA provisions • Social Security
StartUp Accelerator 2014: Understanding Finance & Key elements by Sandeep Gupta (Associate Partner, Ace Global Consulting)_23rd Feb 2014.
StartUp Accelerator 2014: Understanding Finance & Key elements by Sandeep Gupta (Associate Partner, Ace Global Consulting)_23rd Feb 2014.
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