How Does Net Cash Accrual impact the Working Capital?

This is a conceptual question but often people get perplexed and instead of logically thinking about the concept they try to find the formula for Net Cash Accrual. So get the concepts cleared first!

Two Accounting Method: Cash and Cash Accrual Method

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Small firms and businesses mostly follow Cash Method i.e. recording every transaction in cash when the transaction actually happens.

EXAMPLE: Anita sells a furniture in the month of March and amount received in April. In her books, she will record cash received in the month of April. It will show income in April even if no Sale happened and no income in the month of March even after the sales

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In cash method, non-cash items like Depreciation, Goodwill etc are not accounted for. Also, prepaid expenses or losses cannot be amortised over the period of time i.e. if B buys stationery worth Rs.10,000/- for the whole year or more, it will show Rs.10,000 in 1 month and not distribute the amount over different months.

On the other hand in Cash Accrual Method,

–           timely depreciation is shown

–          Prepaid expenses or losses can be amortised. Eg: Every month Rs.1000 can be shown in the expenses

–          Bills payable or receivable are shown when the credit purchase or sale happens and not wait for the actual transaction (i.e. the date of receiving or paying the amount). So if the sale happens in March, it is taxable in the previous year even if amount is received in April

So choosing either of the method will give you different profit and different presentation of your cash flow amounts.

Net Cash Accrual Method not only shows how much Sale actually happened but also the Cash in Bank, Receivables and Payables, Non-cash Items like Pre-paid Expenses (which can be monthly written off)

So over all it shows a detailed picture of Working Capital and WC will increase if all the positive balances are added.

Hope this article helped you.

-D.V.P

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Service Tax

 

Service Tax is an Indirect Tax.  Why is it called an Indirect Tax? Well, you the consumer pay it indirectly to the government.

Service Tax was introduced in India in 1994 by Finance Minsiter Manmohan Singh with an intention to reduce tax burden from Manufacturing /Servicing companies for the services they provide. So how is the burden reduced? It is transferred to the consumers. The service tax is pre calculated and added to the price of a product. When you purchase a product, you are paying the service tax on the product and this amount is paid back to the government by the company.

This service tax is only applicable to those firms whose turnover is more than Rs.10 lacs per annum and all states other than Jammu and Kashmir.  Currently the service tax rate in India is 12.36%.

Service Tax  ——————————————– 12.00%

+ Education Cess @ 2%——————————-  0.24%

+Senior and Higher Education Cess @1%———0.12%

Effective Tax rate                                          12.36%

 

For Firm’s Accounting:

When you sell a product/service you receive the Service Tax from the consumer. You will record it as ST Payable as you are obliged to pay it back to the government what you received it from the consumers or end users.

When you purchase a product/service you are paying service tax the retailer or supplier.  You are the buyer or creditor. If you are a firm purchasing from a supplier, you will record the service tax amount paid on your purchase as ‘’ST Receivable’’.  As you have already paid this ST, this amount will be set off against your ‘’ST Payable’’ obligation.

-D.V.P

Is GST Tax beneficial for you?

Goods and Service Tax is an Indirect Tax planning to be implemented by the government next year in India. Now what is an Indirect Tax? Indirect Tax is a tax which we pay on every goods and services and Manufacturer /Service providers get it paid from us- The Consumers! We pay the Tax on food we eat from restaurants, entertainment tax for movies in Theatres, on our mobile bills, tours, and so on and so forth.  Similarly Manufacturers pay Central and State Sales Tax on the good Manufactured and also on the Goods sold. These taxes are again recovered from us.

Goods and Services Tax (GST) will replace all these indirect taxes. It is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. Well this plan is proposed since 2009 but yet been worked upon to be implemented. At this crucial time when India is looking for ways to increase funds it is believed GST will help improve tax collection and also simplify it reducing the possibility of corruption. In the long run consumers may get cheaper products as taxes won’t be levied at every stage of manufacture to sales. It will promote exports.

GST will replace octroi, Central Sales Tax, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, etc, thus avoiding multiple layers of taxation that currently exist in India.

It is quite relieving to know that these many taxes would be removed. But the tax range of these taxes mostly did not exceed 12.5% and the new GST might have a fixed range of 16%-18% as proposed by the finance minister. So how much the tax payers are going to be convinced on this new tax reform and also how much it will benefit us time will say and also when the actual details of this system is announced!

For more information and updates on GST visit  http://gstindia.com/

D.V.P