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A/c standards vs income tax

CA Krishna Chaitanya M (Chartered Accountant) (463 Points)

13 November 2013

As per AS-1, Accrual method is fundamental accounting assumption, so books of accounts must prepare as per accrual concept, cash basis of accounting is not acceptable. But as per income tax act, for business or profession and for income from other sources, cash basis or mercantile( Accrual) both are acceptable based on method of accounting regularly employed by assesse.

As per AS-1 cash basis not acceptable, so there is no question of cash basis of accounting while preparing books of accounts, Then what's the purpose of income tax provision accepting cash basis of accounting.

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(Guest)

As per Guidence note on Tax Audit under Section 44AB of the IT Act 1961 by ICAI,

10.10 AS apply in respect of commercial, industrial or business activities of an enterprise. In the case of charitable or religious organisations, AS will not apply if all activities of such organisations are not of commercial, industrial or business nature (e.g. an activity of collecting donations and giving them to flood affected people). In other words, exclusion of an entity from the applicability of the AS would be permissible only if no part of the activity of such entity is commercial, industrial or business in nature.

10.19 Financial statements prepared on a basis other than accrual

With regard to the fundamental accounting assumption of accrual, the Council has made a specific announcement that in respect of (a) Sole proprietary concerns/individuals, (b) Partnership firms, (c) Societies registered under the Societies Registration Act, (d) Trusts, (e) Hindu undivided families and (f) Association of persons, the auditor should examine whether the financial statements have been prepared on accrual basis. In case where the statute governing the enterprise requires the preparation and presentation of financial statements on accrual basis but the financial statements have not been so prepared, the auditor should qualify his report.

On the other hand where there is no statutory requirement for preparation and presentation of financial statements on accrual basis, and the financial statements have been prepared on a basis other than ‘accrual’, the auditor should describe in his audit report, the basis of accounting followed, without necessarily making it a subject matter of a qualification.

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Amrut Kulkarni (A) (29 Points)
Replied 13 November 2013

It is recomended that one should follow accounting standard, but if not followed, you have to disclose the same in notes to accounts. Simple enough, on can follow cash system of accounting and disclose it in notes.

In case of companies one can say that the accounting standards must be followed since the governing act prescribes so, but in case of individuals, firms cash system can be followed.

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CA Krishna Chaitanya M (Chartered Accountant) (463 Points)
Replied 13 November 2013

Income tax act prescribes two standards to be followed by assesse, who follows mercantile system of accounting AS I Disclosure of accounting policies AS II prior period items, extra ordinary items.... Is it termed as other accounting standards(out of 32) not necessary to follow for tax audit purpose?

(Guest)

Originally posted by : Amrut Kulkarni
	It is recomended that one should follow accounting standard, but if not followed, you have to disclose the same in notes to accounts. Simple enough, on can follow cash system of accounting and disclose it in notes. In case of companies one can say that the accounting standards must be followed since the governing act prescribes so, but in case of individuals, firms cash system can be followed.