Accounting and taxation are the two most important aspects of starting and operating a business. As a business owner you need to have good understanding of the numbers, margins and cash flows. This article highlights on some of the basics aspects of accounting and taxation requirements for a business. Tax and Accounting Basics for Business Owners . Method of accounting: There are two types of accounting methods: cash basis and accrual basis. The selection between these two methods matters for tax purposes. Under cash basis of accounting, revenues and expenses are reported in the income statement when they are actually received and paid out. However, under the accrual basis of accounting revenues and expenses are reported on the income statement when they are earned and incurred. The income under different heads would require a different treatment as per the Income tax rules in force. The income from business or profession can be recorded either under the cash or the accrual system whichever method is regularly employed by the business entity. The recording can be done under either of the two systems so that a tax payer cannot adopt both the systems as per his convenience. Also the method adopted has to be regularly followed by the tax payer. Maintenance of books of account: Books of accounts to be kept consists of  Journal, Ledger book, Trial Balance, Original and carbon copies of bills/invoices/receipts , Cash Book, Profit and Loss A/c, Balance Sheet and Cash Flow Statements. Companies and LLPs are required to maintain books of accounts as mandated by their governing statute, namely Companies Act, 1956 and LLP Act, 2008. Further, Income tax also casts an obligation to maintain books of accounts, irrespective of the form of business, and has separate provisions related to it. Thus, there may be a situation where a private limited company is required to comply with provisions of Companies Act and Income Tax as well. Profit & Loss Statement: The profit and loss statement (also known as a statement of financial performance or an income statement) summarizes the income for a specified period and subtracts the expenses incurred for the same period so as to calculate the profit or loss for the business over that period. The profit and loss statement will enable you to:

• Know “How much money you making, if any?”
• compare your projected performance with actual performance;
• compare your performance against industry benchmarks;
• use past performance trends to form reasonable forecasts for the future;
• show your business growth and financial health over time;
• detect any problems regarding sales, margins and expenses within a reasonable time so adjustments may be made to recoup losses or decrease expenses;
• provide proof of income if you need a loan or mortgage;

Balance sheet: The balance sheet is like a snapshot of all of your assets as well as your liabilities, and the difference between these two numbers is your equity in your business. In a balance sheet the assets will always equal your liabilities and owner’s equity. This is called double-entry bookkeeping, and is the type done in nearly every business. The reason double-entry bookkeeping is done because it serves as a check to make sure that a transaction has been properly recorded. For example, let’s say the first thing you buy is a computer. You have an asset of office equipment. If you paid cash, you don’t owe any liabilities so your interest in that computer is called your equity. When bankers look at a financial statement, they are interested in various financial ratios. Ratios help indicate the financial strength of a business and how the business can handle payback of loans. For example, current ratio is current assets divided by current liabilities. If your current assets are less than your current liabilities, a red flag is indicated because it would indicate a risk of insolvency during the present year. Various industries will have different levels of ratios. You can track your ratios with others in your industry to see how your business compares. Your banker will probably be most interested in your owner’s equity. Cash flow statements: The cash flow statement identifies the cash that is flowing in and out of the company over a period of time. It organizes and reports the cash generated and used for the operating, financing and investing activities of the. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. Potential investors, lenders and creditors as well as shareholders may be interested in the cash flow statements who want to know the financial position of the company, its ability to repay loans, bills, payroll and other operating expenses of the company. Cash flow control is a great tool because you can predict your future needs for cash before the needs arise. Dealing with the taxes is inevitable as well as tricky and time consuming process. For business owners this process is even more complicated. To avoid troubles you have to plan and pay your taxes on time otherwise you may have to face harsh penalties. Let’s go head to learn some of the basics related to taxation: Income Tax return: If you are a company (whether private or public) or a firm it is mandatory for you to file your Income Tax return irrespective of whether you have made profit or loss during the year. If you want to claim and carry forward your business losses you must file your return.   Tax Audit under Income Tax Act, 1961: A company or LLP is required to undergo Tax Audit u/s 44AB by a Chartered Accountant mandatorily if the turnover of such company or LLP exceeds a threshold limit of Rs 1 crore (for company) or 40 Lacs (for LLP concern). Non compliance may attract penalty under Sec 271B, which is computed as 0.5% of turnover, subject to a maximum limit of Rs 1 lac. Penalty can be levied upto Rs. 5,000 for non-filing of tax return u/s 271F. Recording all expenses and claiming income tax deductions: The expenses incurred in running any business is allowed as deduction against revenues generated. This implies that any expenditure incurred let’s say Rs. 100 may save tax up to Rs. 30.90, depending upon the tax bracket in which the assessee falls. So, you should maintain a proper record of all expenses so that you can claim appropriate deductions. Choosing / converting to the right entity structure: You may opt for sole proprietor, partnership, or LLP or a company as the legal entity for your business. Choosing the right structure can have far-reaching consequences for your business especially in the matters of taxation. You should know the tax laws associated with each of the entities and opt for the one best suited for your business. You can take advice of a professional in this matter as it is one of the most crucial decisions related to your business. However, if you have already opted for a structure and want to convert it a different structure, there are provisions available to do the same. Other Compliances: There are various other types of registrations required to be done and taxes required to be paid by a business like service tax registration and half yearly filing of Service Tax Returns, VAT registration and audit,  quarterly filing of TDS returns, monthly e-filing of VAT returns, etc. To conclude:  A better handle on your money can help you to make and keep long-term goals, manage your cash flow requirements and also improve your profits. Taking advice of an expert will always help you in steering your business. Tax and Accounting Basics for Business Owners .  Please feel free to contact us or visit our manage your business service page.