All You Need to Know About Setting Up Your Books by Yourself

Company registration in India is a simple process, nowadays. By registering yourself as a new user on the MCA portal you can get your first company registered post the prerequisite formalities. This includes some basics like:

· Filling a SPICe form and acquiring a Director Identification Number (DIN) from the MCA portal

· Acquiring a Digital Signature Certificate (DSC) from one of the Certifying Authorities in India

This article is dedicated to small business owners who have either registered as sole proprietors/partnerships or as a One Person Company and are looking for ways to set up their business accounts on their own.

You can set up your accounts even without a degree in accounting if you are aware of the four main Accounting Groups and what they entail.

Business finances are divided into these four Accounting Groups:

Assets: These are the properties or items owned by you. Even if these properties are not available currently but stand a chance of being acquired later, you would still have to consider them as assets.

Expense: Includes all business expenses except employee salary as it falls under liability. Increasing expense is considered as debit whereas decreasing expense is regarded as credit.

Liabilities: The money you owe to your creditors, suppliers, employee salary etc.

Income: Your business revenue all in all. Increasing income is credited whereas decreasing income is debited.

These are the 4 broad accounting groups which are again divided into further categories to distinguish one account from the other.

Within the Accounting group Assets, we have the following categories:

Bank Account: The bank account where all your business incomes are deposited.

Branches: If your business has several branches/divisions which generate revenues in some way or the other, you will have to consider them as assets. These are also called cost centres.

In-hand Stock: Your products/stock until they are not sold are considered assets. For service-based businesses the in-hand stock includes intangible properties like intellectual property, patents, trademarks etc.

In-hand Cash: The fund you have started your business with.

Investments: Maturity amount of current or past investments which you wish to utilize in your business.

Sundry Debtors/Accounts Receivable: Products/services you have lent to customers on credit or those who owe you money.

Fixed Assets: This includes equipment, machinery, electronic appliances etc. In other words, any property with a depreciation value.

Deposits: Any type of security deposits such as those in the capacity of office rent, which are refundable.

Current Assets: All the assets that are likely to be sold off, used, or exhaust themselves within a year of their accumulation by means of business operations are considered as current assets. These include cash equivalents, stock, accounts receivables, advanced payments for goods etc.

Some current assets that can be directly converted into cash are ranked higher than those that do not translate into cash, like prepayments for goods, payments to insurance companies or contractors etc. This ensures proper distinction of current assets.

Also, an account receivable may remain uncollected within the same year. In that case it is written down as bad debt and considered an expense.

Deferred Tax Assets — The losses your business incurs within a financial year will be considered as assets if these losses are carried forward to the following financial years to reduce tax. Record

Loans and Advances: Loans extended to parties that are likely to be recovered, for example to employees, directors, or sister concerns.

Advance payments such as VAT or excite duties that are paid in advance are called Advances and are considered Assets. Similarly, prepayment for goods or services are also registered as Assets.

Miscellaneous Expenses Assets: These include preliminary expenses, expenses on shares and debentures, etc, in other words expenses that are not directly associated with revenues. These expenses are written off when they materialize. They are included in assets as they might reduce the balance of the current assets.

Now let us talk about the segments that make up the Accounting Group, Expenses. These are:

Purchase Account: The expense that goes into buying the stock to be sold in a business year. Purchase is debited to account for the increase in expense.

Direct Expense: Expenses that directly relate to the selling of products/services. These expenses influence the selling price of the products/services. Examples include staff wage/direct labour, raw materials, customer service, purchase of goods, transport of goods from the supplier etc.

Indirect Expense: This refers to the overhead costs of a business which must be borne to continue operations. Examples include salaries of permanent employees (different from direct labour), insurance, equipment depreciation and maintenance, utility bills, legal fees, advertising, and marketing expenses etc.

The third Accounting group you should maintain is Income. The components of Income are as follows:

Direct Income: These are incomes directly associated with the business, such as sales of goods or services.

Indirect Income: Non-business activities which nevertheless earn you a revenue are considered indirect income. Examples may include received interest, received discounts, selling of old assets etc.

Sales Account: The income earned from the selling of goods. Sales account income is recorded in association with the total expense gone into the acquirement of the goods in determining net income.

The Accounting head, Liabilities, record the amount your business owes to various parties in the current period or, in the near future.

Bank OD Account: Besides the general bank account your business might have a Bank overdraft account which allows you to draw money beyond the existing balance amount. This is an overdraft which your business must repay.

Loan: Any loans your business owes to lenders or lending institutions without the existence of a collateral.

Secured Loan — If the business has secured a loan against a collateral, the business is liable for the repayment of the loan and the reclamation of the security thus deposited with the lending institution.

Duties and Tax: The business’ liabilities toward the government.

Current Liability: The business’ obligations towards its customers who have paid in advance in terms of delivering the goods owed to the customers or, repaying the advance if the business fails to deliver the goods.

Provision: Provision denotes the money that the business must set aside for unforeseen liabilities that may crop up in the future. This includes:

•A decrease in the value of the assets

•Guarantees

•Losses

•Deferred tax might fall under liabilities if an income is recognized as taxable after revenue is generated.

•Restructuring Liabilities

•Pension

•Severance Costs

Sundry Creditors: If your business acquires goods on credit, it is your business’ obligation to make the due payments on time.

Sundry creditors are the amounts payable to the suppliers of goods. Creditors are the liability of the business entity. Liability for such creditors reduces with the payment made to them.

Capital Account: The business and the business owners are separate entities. Therefore, it is the obligation of the business to return any investment amount the owners have put in in the course of the business, after the business dissolves.

Reserve and Surplus: After the clearance of expenses and liabilities, the profit, and the surplus profit that the business makes are recorded under Reserve and Surplus, as these are the amounts the business owes to its shareholders and owners. It also includes shareholders’ equity.

So, that is all you must know about the Chart of Accounts that combines all the aspects of your business finances.

Though, all the information shared so far seems a lot to assimilate right now, with an accounting software for small businesses, accounting would cease to be an overwhelming task. Let us see how.

An accounting software for small business would usually have an in-built chart or accounts with nominal codes. This means, no manual intervention in creating Assets, Expenses, Liabilities, Incomes et al would be required, because your accounting software already knows which one is which. All you need to do is enter the amount pertaining to buying an equipment, paying employees, incomes, investments and so on against the pre-existing chart of accounts.

Each Accounting Group and their sub-parts are denoted by a unique nominal code. For example, Sales of goods, which is one of the components of the Accounting Group ‘Income’, would have a unique Nominal Code different from Cost of Goods Sold/Cost of Sales, which is a component of the Accounting Group ‘Expense’. Furthermore, you can add a ‘Description’ of the type of the sale or expense.

When you record a Supplier and a Customer invoice as paid on the accounting software, the Chart of Accounts pertaining to Purchases and Sales of Goods under the Accounting Groups Expense and Income are updated automatically.

One last thing that should hit the nail on the head is an awareness of Journal entry and the three rules of accounting.
The best accounting software would have a feature for Journal entry. Here you can simply choose a Nominal code from the Chart of Accounts you have thus created.

Enter the amount as Credit for Incomes and Gains, and Debit for Expenses and Losses.

Enter the amount as Credit for Liabilities or Shareholders’ equities if they increase, and Debit for Assets if they increase. Reverse the rule for a decrease in Liabilities, Shareholders equities and Assets.

Debit the receiver and credit the giver. This means your supplier will be your creditor and your customers will be your debtor.

And, that is a wrap on all you need to know about setting up your business accounts on your own.