ACCOUNTS

I. INTRODUCTION
Accountancy & Taxation is
gaining a very extensive
recognition both within and
outside the business world. It
has rightly been termed as the
language of the business. The
basic function of a language is to
serve as a means of
communication. Acounting and
Taxation serves this function. It
Communicates the results of
business operation to vaious parties who have some stake in the
business Viz, the owners
creditors, investors, Government and other agencies. The need of
Accounting and Taxation is of great importance for a person who is
running a business.

It suggests that accounting is about providing information to others.

Accounting information is economic information - it relates to the
financial or economic activities of the business or organisation.

- Accounting information needs to be identified and measured. This is

done by way of a "set of accounts", based on a system of accounting
known as double-entry bookkeeping. The accounting system identifies
and records "accounting transactions".

- The "measurement" of accounting information is not a straight-

forward process. it involves making judgements about the value of
assets owned by a business or liabilities owed by a business. it is also
about accurately measuring how much profit or loss has been made by a
business in a particular period.

An Account (in bookkeeping) refers to assets, liabilities, income,

expenses, and equity, as represented by individual ledger pages, to
which changes in value are chronologically recorded with debit and
credit entries. These entries, referred to as postings, become part of a
book of final entry or ledger. Examples of common financial accounts are

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cash, accounts receivable, mortgages, loans, PP&E, common stock, sales,
services, wages, and payroll.

A chart of accounts provides a listing of all financial accounts used by

particular business, organization, or government agency.

The system of recording, verifying, and reporting such information is

called accounting. Practitioners of accounting are called accountants

Profit and Loss Describing the trading performance of the business over
Account the accounting period
Statement of assets and liabilities at the end of the
accounting period (a "snapshot") of the business

An income tax is a tax levied on the income of

individuals or businesses (corporations or other legal
entities). Various income tax systems exist, with varying
degrees of tax incidence. Income taxation can be
progressive, proportional, or regressive. When the tax is
levied on the income of companies, it is often called a
Balance Sheet
corporate tax, corporate income tax, or profit tax.
Individual income taxes often tax the total income of the
individual (with some deductions permitted), while
corporate income taxes often tax net income (the
difference between gross receipts, expenses, and
additional write-offs). Various systems define income
differently, and often allow notional reductions of income
(such as a reduction based on number of children
supported).

PRINCIPLES

The "tax net" refers to the types of payment that are taxed, which
included personal earnings (wages), capital gains, and business income.
The rates for different types of income may vary and some may not be
taxed at all. Capital gains may be taxed when realized (e.g. when shares
are sold) or when incurred (e.g. when shares appreciate in value).
Business income may only be taxed if it is significant or based on the

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manner in which it is paid. Some types of income, such as interest on
bank savings, may be considered as personal earnings (similar to wages)
or as a realized property gain (similar to selling shares). In some tax
systems, personal earnings may be strictly defined where labor, skill, or
investment is required (e.g. wages); in others, they may be defined
broadly to include windfalls (e.g. gambling wins).

Tax rates may be progressive, regressive, or proportional. A progressive

tax applies progressively higher tax rates as earnings reach higher levels.
For example, the first $10,000 in earnings may be taxed at 5%, the next
$10,000 at 10%, and any more income at 20%. Alternatively, a flat tax
taxes all earnings at the same rate. A regressive income tax may apply to
income up to a certain amount, such as taxing only the first $90,000
earned. A tax system may use different taxation methods for different
types of income.

Personal income tax is often collected on a pay-as-you-earn basis, with

small corrections made soon after the end of the tax year. These
corrections take one of two forms: payments to the government by
taxpayers who did not pay enough during the tax year; and tax refunds
from the government to those who overpaid. Income tax systems often
have deductions available that lessen the total tax liability by reducing
total taxable income. They may allow losses from one type of income to
be counted against another. For example, a loss on the stock market may
be deducted against taxes paid on wages. Other tax systems may isolate
the loss, such that business losses can only be deducted against business
tax by carrying forward the loss to later tax years.

The idea of a progressive income tax has garnered support from

economists and political scientists of many different ideologies, from
Adam Smith in The Wealth of Nations[1] to Karl Marx in The Communist
Manifesto.[2] Income taxes are used in most countries around the world,
but are not without criticism. Frank Chodorov wrote "... you come up
with the fact that it gives the government a prior lien on all the property
produced by its subjects." The government "unashamedly proclaims the
doctrine of collectivized wealth. ... That which it does not take is a
concession."[3] The economic effects of an income tax system have also
been criticized for penalizing work, discouraging saving and
investment, and hindering the competitiveness of business and
economic growth.[4][5] Income taxes are also not border-adjustable;
meaning the tax component embedded into products via taxes imposed

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on companies cannot be removed when exported to a foreign country
(see Effect of taxes and subsidies on price). Alternate tax systems such as a
national sales tax or value added tax remove the tax component when
goods are exported and apply the tax component on imports

Sales tax

A sales tax is a consumption tax charged at the point of purchase for

certain goods and services. The tax amount is usually calculated by
applying a percentage rate to the taxable price of a sale. A portion of the
sale may be exempt from the calculation of tax, because sales tax laws
usually contain a list of exemptions. Laws governing the tax may require
it to be included in the price (tax-inclusive) or added to the price at the
point of sale.

Most sales taxes are collected from the buyer by the seller, who remits
the tax to a government agency. Sales taxes are commonly charged on
sales of goods, but many sales taxes are also charged on sales of services.
Ideally, a sales tax would have a high compliance rate, be difficult to
avoid, and be simple to calculate and collect

SALES TAX PLANNING

Businesses can reduce the impact of sales tax for themselves and their
customers by proactively planning for the tax consequences of all
activities. Sales tax planning should include the following:

 Designing invoices to reduce the taxable portion of a sale

transaction. In Maryland, for example, a delivery charge is exempt
from the tax when stated separately from handling and other
taxable charges.[11]
 New facilities. Jurisdictions with no sales tax or broad exemptions
for certain types of business operations would be an obvious
consideration in selecting a site for a new manufacturing plant,
warehouse or administrative office.
 Delivery location. For a businesses operating in several
jurisdictions, choosing the best location in which to take delivery
can reduce or eliminate the sales tax liability. This is particularly
important for an item to be sold or used in another jurisdiction
with a lower tax rate or an exemption for that item. Businesses
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 should consider whether a temporary storage exemption applies
to merchandise initially accepted in a jurisdiction with a higher tax
rate.
 Review of company purchases to determine whether tax was paid
in error for equipment and supplies qualifying for exemptions,
especially in jurisdictions with broad manufacturing exemptions.
Some jurisdictions allow refunds as long as three or even four
years after the tax was paid.[12]
 Periodic review of record-keeping procedures related to sales and
use tax. Proper supporting detail, including exemption and resale
certificates, invoices and other records must be available to defend
the company in the event of a sales and use tax audit. Without
proper documentation, a seller can be held liable for tax not
collected from a buyer.

TAXATION

Taxes are levied by the Central Government and the State Governments.
Some minor taxes are also levied by the local authorities such the
Municipality or the Local Council.

The authority to levy a tax is derived from the Constitution of India

which allocates the power to levy various taxes between the Centre and
the State. An important restriction on this power is Article 265 of the
Constitution which states that "No tax shall be levied or collected except by
the authority of law."[1] Therefore each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the
State Legislature.

  India has a well developed tax structure with a three-tier federal

structure, comprising the Union Government, the State Governments
and the Urban/Rural Local Bodies. The power to levy taxes and duties is
distributed among the three tiers of Governments, in accordance with
the provisions of the Indian Constitution. The main taxes/duties that the
Union Government is empowered to levy are Income Tax (except tax on
agricultural income, which the State Governments can levy), Customs
duties, Central Excise and Sales Tax and Service Tax. The principal taxes
levied by the State Governments are Sales Tax (tax on intra-State sale of
goods), Stamp Duty (duty on transfer of property), State Excise (duty on
manufacture of alcohol), Land Revenue (levy on land used for
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agricultural/non-agricultural purposes), Duty on Entertainment and
Tax on Professions & Callings. The Local Bodies are empowered to levy
tax on properties (buildings, etc.), Octroi (tax on entry of goods for
use/consumption within areas of the Local Bodies), Tax on Markets and
Tax/User Charges for utilities like water supply, drainage, etc.

Since 1991 tax system in India has under gone a radical change, in line
with liberal economic policy and WTO commitments of the country.
Some of the changes are:

 Reduction in customs and excise duties

 Lowering corporate Tax
 Widening of the tax base and toning up the tax
administration

 Direct Taxes

A Direct tax is a kind of charge, which is imposed directly on the

taxpayer. The examples of direct tax include property tax and income
tax. Alternatively, it can be said that a direct tax is one that is taken away
from one's salary or wages. When the tax is imposed by the government
upon the property, then it is called property tax, which is also a direct
tax.

Meaning of Direct tax: Different views

The term direct tax can be defined from two different perspectives. One
is from Colloquial point and the other is from U.S. constitutional law
point. Certain taxes may fall under indirect tax categories in the
constitutional sense, but fall under direct tax category in the colloquial
sense.

Direct tax in India

In India, all the direct tax related matters are taken care by the Central
Board of Direct Taxes (CBDT), which is a significant division of the
Department of Revenue, Ministry of Finance, Government of India.
CBDT is functioning under the Central Board of Revenue Act 1963.
CBDT is responsible for formulating and enforcing direct taxes in India.
One of the vital functions of CBDT is to administer direct taxes law
followed by Income Tax Department.

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The tax system in India is primarily demarcated under the control of
Central and State Government. The Central Government is primarily
responsible for imposing taxes on income, custom duties, central excise
and service tax. The State Government is responsible for levying taxes
like State Excise, stamp duty, VAT (Value Added Tax), land revenue and
professional tax. The local bodies are also authorized to impose tax on
properties, octroi and many more.

Difference: Direct and Indirect tax

In the colloquial sense, a direct tax is levied by the government directly

to the taxpayers, whereas the indirect tax (or collected tax) is collected
by intermediaries, who eventually file tax returns and passes to the
respective department. Examples of direct taxes include income taxes,
some corporate taxes and transfer taxes. Examples of indirect taxes
include Value Added Tax and Sales Tax.

INDIRECT TAXES:

Indirect taxes are the charges that are levied on goods and services.
Some of the significant indirect taxes include VAT (Value Added Tax),
sales tax, excise tax, stamp duties and expenditure tax.

Unlike Direct Taxes, Indirect Taxes are not levied on individuals, but on
goods and services. Customers indirectly pay this tax in the form of
higher prices. For example, it can be said that while purchasing goods
from a retail shop, the retail sales tax is actually paid by the customers.
The retailer eventually passes this tax to the respective authority. The
indirect tax, actually raises the price of a good and the customers
purchase by paying more for that product.

Meaning of indirect taxes: Different views

The term indirect tax can be defined from different views. In the
colloquial sense, an indirect tax is the charge that is collected by
intermediary (like retail store) from the individual who holds the actual
economic burden of the tax ( like customer). The intermediary files a tax
return and eventually passes to the government.

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The indirect tax can be alternatively defined as the charge that is paid by
one individual at the beginning, but the burden of which will be passed
over to some other individual, who eventually holds the burden.

Indirect tax in India

The indirect tax in India constitutes a group of tax laws and regulations.
The indirect taxes in India are enforced upon different activities
including manufacturing, trading and imports. Indirect taxes influence
all the business lines in India.

SALES TAX:

A sales tax is a consumption tax charged at the point of purchase for

certain goods and services. The tax amount is usually calculated by
applying a percentage rate to the taxable price of a sale. A portion of the
sale may be exempt from the calculation of tax, because sales tax laws
usually contain a list of exemptions. Laws governing the tax may require
it to be included in the price (tax-inclusive) or added to the price at the
point of sale.

Most sales taxes are collected from the buyer by the seller, who remits
the tax to a government agency. Sales taxes are commonly charged on
sales of goods, but many sales taxes are also charged on sales of services.
Ideally, a sales tax would have a high compliance rate, be difficult to
avoid, and be simple to calculate and collect.

SERVICE TAX:

It is a tax levied on the transaction of certain specified services by the

Central Government under the Finance Act, 1994. It is an indirect tax, in
which normally the service provider pays the tax and recovers the
amount from the recipient of service.

Service Tax was first levied on General Insurance Services, Stock

Broking and telephone and Pager services. The Central Excise
Department administers the Service Tax Law.

Services covered under Service Tax:

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101 types of services are covered under the service tax. As per the
annual budget 2008-09, 4 more services are added to the present list.
Click here for the list of Services Covered.

INCOME TAX

An income tax is a tax levied on the income of individuals or businesses

(corporations or other legal entities). Various income tax systems exist,
with varying degrees of tax incidence. Income taxation can be
progressive, proportional, or regressive. When the tax is levied on the
income of companies, it is often called a corporate tax, corporate income
tax, or profit tax. Individual income taxes often tax the total income of
the individual (with some deductions permitted), while corporate
income taxes often tax net income (the difference between gross receipts,
expenses, and additional write-offs). Various systems define income
differently, and often allow notional reductions of income (such as a
reduction based on number of children supported.

Value added tax:

A value added tax (VAT) is a form of consumption tax. From the

perspective of the buyer, it is a tax on the purchase price. From that of
the seller, it is a tax only on the "value added" to a product, material or
service, from an accounting view, by his stage of its manufacture or
distribution. The buyer remits to the government the difference between
these two amounts, and retains the rest for themselves to offset the taxes
he had previously paid on the inputs.

The "value added" to a product by a business is the sale price charged to

its customer, minus the cost of materials and other taxable inputs. A
VAT is like a sales tax in that ultimately only the end consumer is taxed