Income Tax : 10 important Points for closure of books of accounts at the year end

Closure of books of accounts: As the year end is approaching, it is important to consider all relevant aspects regarding the closure of books of accounts under income tax. For your kind perusal, here we have summarized 10 key points that need to be considered for proper closing of books of account.

1. Booking and reconciling the revenue

Based on the matching concept, it is required to book revenue in the year expenses pertaining to such revenue are claimed. For this purpose, especially in case of organization engaged in service industries requires booking the revenue based on the completion of work at the year end. So, accrued revenue is required to book at the year end.

Now a days it is utmost important to reconcile the turnover with the GST. Turnover reported in GSTR 1 requires matching with books of accounts. Any difference in that need to be reconciled and proper effect should be given whenever requires.

Read Also: GST Turnover v/s Income Tax Turnover

2. Closing Stock

Closing stock has substantial impact on the final result. Hence, it should be ensured that the proper counting and verification of the closing stock are to be done.

At the same time, valuation of closing stock is equally important. It is required to check whether all components of the cost has been considered while valuing the stock.

Alongwith cost of inventory, Net realizable value (NRV) of the inventory on hand is required to identify. To arrive at final value of closing inventory, comparison of the actual cost and net realizable value should be done.

Further in case of entity to which Income Computation and Disclosure Standards (ICDS) of the Income Tax are applicable, is required to do some additional exercise for the purpose of complying with the provisions of ICDS. However, it is important to note that no adjustments pertaining to ICDS is required to be given in books of accounts.

3. Booking Indirect incomes

Indirect incomes like FD interest, commission income required to book at the end of the year. Care must be taken that accrued interest on FDs and such other instruments gets accounted properly. Implication of GST on such indirect income shall be considered with utmost care.

Read Also: Tax on Interest Income – Saving Account, PPF, Fixed Deposits, bonds, R/D

4. Booking of Expenses

Ensure that all the expenses that were required to be booked have been considered. The person should make proper arrangement for timely availability of records relating to reimbursement of various expense to employees so as the expenses are booked in the same year.

Year-end provision on closure of books of accounts is very important. Provision in relation to various expenses like electricity, Audit Fees, various ascertained liabilities like gratuity, employer share on provident Fund, etc. need to book at the year end.

While making a yearend provision, care must be taken that the along with making the provision of expenses, the TDS on such expenses are deducted.

Read Also: ITR Filing: Balance Sheet and Profit and Loss; 15 points for Preparation

5. Depreciation Working

Based on the applicable provisions to the entity, it is required to calculate the depreciation at the end of the year.

Along with that the Depreciation as per the income tax also need to be calculated. The depreciation as per income tax will help in calculation of deferred tax working based on which deferred tax expense or income is required to book at the end of the year.

Read Also: Depreciation – How to calculate depreciation under Income Tax?

6. Cash and Bank Balance

It must be ensured that the cash reflected in the balance sheet and the actual cash on hand tallies. It is required to check all the bank accounts and ensure that the bank reconciliation is done and it tallies with bank statement.

Any cash credit, overdraft or loan facility availed then statement of the same must be called on and entries relating to interest and principal amount should be properly passed in books.

Read Also: Cash Transaction Limit in India – cash payment and cash receipt

7. 26AS Reconciliation

The reconciliation of 26AS with books of accounts is very important exercise.

Two ways reconciliation of 26AS needs to be done. First is to reconcile whether the income reflected in 26AS has been properly dealt with in books of accounts. Second is to reconcile the TDS/TCS amount reflected in 26AS with TDS/TCS receivable in books.

Read also: 10 Key things taxpayers must know about New Form 26AS

8. Confirmation of Balances from vendors and customers

Cross ledger of vendor and customer must be obtained and ensure that the balance of ledger match with counterparty.

Any discrepancy needs to be resolve at the earliest so that the proper impact of the same can be given in books.

9. Reconciliation of Government dues

Matching of GST ledgers with Electronic credit ledger as well as Electronic cash ledger is required to be done.

Ledger of TDS payable should be in conformity with the challans paid and unconsumed challan if any.

10. Overall Review of books

Once the action on above mentioned points completed, it again requires to review the overall books at the time of closure of books of accounts.

This includes comparison of current year with previous year, analysis of various ratios. If any adverse check found, then detailed review must be done for that aspect.

It is also very important to review the books from income tax perspective like any expense on which TDS is required to be deducted but the same has not been deducted. Any payment made during the year in cash in excess of prescribed limit. In such a situation, necessary action to make the same good is required to be undertaken.

Read Also: Books of Accounts -Section 44AA of Income Tax Act, 1961