Customers and Revenue are the backbone of any business. The intent of any business is to serve the customers diligently so that the business expands so that revenue also shows an upward trend. Hence, a timely record of the income and expenses should be kept so that the business owner can check whether the business is generating profits for a particular month, quarter, or year.

As per accounting principles in India, the transactions should be recorded as & when they occur. It is likely that cash flow for a few transactions happen at a later point in time. Financial statements are used to keep a track of the financial health of the business and a common format is followed so that it becomes easy to compare financial results to measure the performance.

Accounting methods are used to record the income after the expenses are paid. Income is in turn used to calculate the profits. Businesses look at Profit before Tax (PBT) and Profit after Tax (PAT) to calculate the generated profits. Profit before Tax (PBT) is the company’s profits before the company pays corporate income tax whereas Profit after Tax (PAT) is a mechanism to look at the company’s profits after the corporate income tax is paid. Hence, businesses strive hard to ensure that there is top-line and bottom-line growth.

Accounting methods can be cash-based or accrual-based. Normally micro-businesses in India accept cash and revenue is recorded when cash/money is changing hands. It can be used when the scale of the business is small else keeping a track of the cash becomes difficult.

The other accounting method is accrual-based where recording of accounting transactions is done when revenue is earned and when expenses are incurred. This is irrespective of when the income is collected. It is the most popular accounting method used by Indian businesses as it is well-suited for businesses that don’t deal with cash.

Once a particular accounting method is used by the business, it can only be changed after approval from the Indian tax authorities.

The biggest advantage of using cash-based accounting system is that it is simple. Revenue is recognized when cash is received. It is suitable for companies that do a good deal of cash transactions and do not have to maintain large inventories. The downside of cash-based accounting system is that it becomes difficult to track actual dates of sales and purchases.

Accrual-based accounting system provides complete view of business transactions when compared to cash-based accounting system. The advantages of accrual-based accounting are that it is compliant with GAAP, can be used if your company is dealing with large amount of money, provides better picture about the financial results of the company which helps you to make more informed decisions.

The bottom line is that the founder or promoter has the best visibility of the business and he/she needs to choose the ideal accounting method after looking at the size of the business and consulting the finance team of their business.

Indian Accounting Standards (IAS) is the standard in accounting that is adopted by the organizations in India. A uniform accounting process is followed which is under the framework of GAAP (Generally Accepted Accounting Principles). Uniformity is maintained so that there is consistency in the format of the financial statements of the companies.

Accounting principles are based on concepts & conventions that have global acceptance. As the same conventions are followed, a widely-used common vocabulary for recording financial statements is used as a part of the accounting principles.

Below are the four main conventions used in financial accounting:

• Consistency – The same accounting principles should be used so that there is consistency and the same standard is applied for the P&L calculation.
• Full disclosure – All the details of the business should be disclosed. This also includes the list of debtors and creditors.
• Conservatism – A convention by which a lower-value transaction is recorded in case two values of the transactions are available.
• Materiality – All the material facts i.e. documents that pertain to the historical events of the facts should be recorded else it could affect the financial statements.

To conclude, the business owner has to understand the nuances of financial accounting and choose the accounting method based on the size & scale of the business.

Author: Shruti Sharma

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