Accounts A-Z: Your Closing Chapter
We know that we have reached the close of the financial year, and hence, it is essential to finalize the books of accounts for the current financial year so as to track and compare the overall position of the financial performance on a year-on-year basis and to comply with various year-end compliances. The process ensures that financial statements are accurate, complete, and ready for review.
Various key check points as a part of the finalization of accounts process are listed hereunder:
1. Reconciliation of Sales: The Sale or income shown in the books and the GST portal should be accurate. This fosters the avoidance of various GST notices with respect to mismatches in sales recorded in books and sales reported in various GST returns. It is almost essential for every business to perform a 360-degree reconciliation of Sales on monthly basis and identify the cause of such differences if any differences are there. Such differences so identified should be rectified in the March GST Returns itself for better practice although such rectification is allowed on GST portal till November following the end of the Financial Year or Annual GST Return whichever is earlier. The sales account serves as a key record for auditors to verify the accuracy of reported revenue, ensuring the financial integrity of the business.
2. Provisions: Making provisions is a requirement under various accounting standards, including International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), ensuring that financial statements present a true and fair view of the business's financial position. The necessary provisions like Tax, Audit fee, Salary, Bonus and entries for various recurring expenses such as electricity, telephone etc to be passed to book the expenses for the current financial year.
3. Reconciliation of Tax Deducted at Source/Tax Collected at Source Returns: Each business needs to file their TDS/TCS Returns on quarterly basis. Many times it happens that such filed returns may not reconcile with the entries passed in the books for the common reasons such as passing of entries after filing TDS/TCS Returns, modification of entries affecting TDS/TCS after filing TDS/TCS Returns. In such cases, reconciliation of TDS/TCS returns need to be performed. Differences must be identified before closing of books and revision of TDS/TCS returns should be done on timely manner to ensure TDS/TCS Returns filed are in conformity with the Books of Accounts. As a part of performance of reconciliation of such returns, many times, various payments relating to Late Fees, Interest on Short Payment of TDS, and Interest on Late payment of TDS etc. are identified. Then, in such cases various proper effect of such entries need to be given in the books of accounts. The information in TDS Returns is crucial for deductees as it impacts their tax liabilities and refunds, and is essential for the correct filing of their income tax returns.
4. AIS/TIS: A MOU was signed between CBDT (Income Tax Dept.) and CBIC (GST Dept.) for data exchange between the two organisations. This MOU facilitates the sharing of data and information between CBDT and CBIC on an automatic and regular basis. At the time of finalization of books of accounts, one must assess the income reported in the Annual Information Statement (AIS). AIS also reports purchase and sale data of an assessee, and this data auto populates from purchases reported under GSTR-1 of the seller i.e. purchases as per our GSTR-2B and sales reported under GSTR-3B.
5. Reconciliation of Bank Accounts: Reconciling various bank accounts/ OD Accounts/CC Accounts with bank statements is the most important process and any differences between bank balances and bank statements can lead to incorrect reporting and can lead to questions with respect to management’s integrity. Many times, expired/stale cheques are still lying in the books of accounts for which reversal entries are pending to be passed which can be an another reason of incorrect reporting of bank balances in the books of accounts as on March 31. To mitigate these types of common errors, documentation of Bank Balances Certificates as on March 31 should be followed which can in turn help to auditors at the time of the Internal/Statutory Audits.
6. MSME: As per amended Section 43B(h) effective from April 1 2023, any sum payable to MSME enterprise (Micro and Small) beyond the time limit specified in MSMED Act 2006 shall be allowed in the year when actual payment is made by the assessee. Due dates of 15 Days/45 Days for such payments of such applicable MSME Enterprises should be identified as on March 31 as any payment pending to such enterprises as on March 31 for which payment is done in the next financial year after due date will not be allowed to be claimed as an expense in the current financial year and such expense will be allowed only in next financial year in which payment has been made. As this amendment is significant and can affect largely on working capital, a proper attention needs to be given to ensure smooth compliance. Further, as per the above amendment, Interest is applicable at the rate of 3 times the repo rate for the payment after the specified due dates. Hence, such payments are required to be identified and provision of such Interest needs be provided in the books as on March 31 for applicable transactions. For further details, click on the link: https://www.aagamshahca.com/news-detail/43B-MSME-Amendment
7. Suspense Account: It is common practice in business to keep unidentified receipt/payment entries in Suspense Account throughout the year and such entries remain unidentified due to poor efforts or lack of proper information. In such cases, proper attention needs to be drawn to business owners for clearance of such Suspense entries to present financial statements in a better way. Proper mechanism to clear Suspense entries must be established on regular intervals to avoid chaos at the time of finalisation of books.
8. Overall Scrutinising of Various Ledgers:
A detailed scrutiny of various ledgers must be required to be performed at the end of March by an independent authority such as Internal Auditors to identify key errors in recording various transactions. Many times, following common errors are identified by such Independent Authority:
• Negative transactions in expense ledgers i.e. passing of credit entries in expense ledgers without legitimacy.
• Non settlement of Creditors ledger despite payment made to them causing booking of expense twice in the books.
• Negative Cash Balance.
• Recording of Business owner’s personal expenses in P&L Account resulting to understatement of Profit.
• Wrong carried forwarded opening balances from the previous year’s final accounts.
The above list is just an illustrative list. To avoid such errors, a robust internal control system for recording of transactions can be established by the management.
10. Set off of GST Input/Output Accounts: In normal course of business, it is essential to Set Off various GST Ledgers such as Input IGST, CGST and SGST against output GST Liability ledgers on monthly basis itself. Transactions which are not reflected in GSTR 2B up to a specified period should be kept in separate ledger to keep a track of the same in the upcoming financial year. If any entries for which GST ITC has been availed which are specifically blocked are identified, such entries should be reversed in GST Returns and such entries need to be expensed out by charging the same to P&L Account.
11. Depreciation on Fixed Assets: It reduces the recorded value of an asset in the balance sheet to reflect its wear and tear, usage, or obsolescence over time, ensuring the assets are accurately valued on the financial statements. Depreciation serves as a non-cash expense that reduces the taxable income of a business. Proper year end entries for charging Depreciation should be entered after recognising proper method and rates as per the accounting policies adopted in the books of accounts.
12. Analysing Profit or Loss Statement: A year on year analysis is essential to keep a track various expense. Sometimes, management is not aware about sudden increase in expenses. Various ratios can be helpful to the management to identify such anomaly. Before finalisation of books of accounts, such irregular expense accounts should be identified and scrutinised in depth to go to the root cause of such anomaly and based on that an action plan can be prepared by the management to control such abnormal costs to the business. On Income side, besides sales income, other income such as Interest on FD, Income from Disposal of investments, scrap sales income etc should be reconciled with various external documents such as Interest Certificate, Capital Gain Statements provided by the Broker, Form 26AS/AIS etc.
Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.
