I have a query regarding accounting treatment of the following transaction and effect of the same on the face of Balance sheet. Please help me out in my query keeping all acts in mind, i need the proper explanations also.
Query:- 1. Our client is running coaching institute. 2. He takes fees from students in instalment basis. 3. Currently he is doing income entry on receipt basis, as as and when the amount paid by the candidate.(In tally he prepare all the Students under Debtor Group) 4. I suggested them to book like it, please tell me whether it can be done or not?? a) Debtors A/c Dr. (Current Asset) To Provision for Services (Current Libility) (With full amount to be receivable) b) Bank or Cash Ac. Dr. (Amt. Received) To Debtors c) Provision for Services To Tution receipts (Income) (With the amount received from student debtor)
Please tell me whether i can do this, also when the ST laibility arises and how it will be presented in Books of A/c's and implication under Income tax Act.
If other arrangements could also be done, please feel free to tell me that also.
14 July 2024
Certainly! Let's address your query regarding the accounting treatment for a coaching institute that collects fees from students in installment basis and how it affects the Balance Sheet and Income Tax implications.
### Accounting Treatment:
1. **Recording Income on Receipt Basis:**
Currently, the institute records income when it receives payments from students. This means income is recognized only when cash is received, which is a cash basis of accounting.
2. **Suggested Accounting Treatment:**
To align with accrual basis accounting principles and to provide for unearned income (fees yet to be earned):
a) **Initial Booking:** ``` Provision for Services (Current Liability) Dr. To Debtors (Current Asset) ``` - Debit Provision for Services to recognize the liability for the fees yet to be earned. - Credit Debtors to reflect the amount receivable from students.
b) **When Payment is Received:** ``` Bank/Cash Account Dr. To Debtors ``` - Debit Bank/Cash Account for the amount received. - Credit Debtors to reduce the receivable.
c) **Recognition of Income:** ``` Provision for Services Dr. To Tuition Receipts (Income) ``` - Debit Provision for Services to reduce the liability as income is earned. - Credit Tuition Receipts (Income) to recognize the revenue earned from tuition fees.
### Implications and Clarifications:
- **ST Liability (Service Tax Liability):** - Service Tax liability arises when taxable services are provided. In the case of coaching institutes, if the services provided are taxable under Service Tax laws, the liability arises based on the service tax rate applicable at the time of service provision or receipt of payment, whichever is earlier. - The service tax collected from students should be separately accounted for and remitted to the government as per the Service Tax rules applicable at the time.
- **Presentation in Books of Accounts:** - **Balance Sheet:** The Provision for Services (Current Liability) will appear under current liabilities until the income is recognized. - **Income Statement:** Tuition Receipts (Income) will be reported as revenue in the income statement once earned.
- **Income Tax Act Implications:** - Income tax implications depend on whether the institute follows cash basis or accrual basis for income recognition. - Under accrual basis, income is recognized when earned, regardless of receipt. - Deductions for expenses related to earning income are allowable as per Income Tax Act provisions.
### Other Considerations:
- **Deferred Revenue (Unearned Income):** - Consideration should be given to whether all fees are fully earned when received or if they should be recognized over the duration of the course. - Deferred revenue (unearned income) may need to be disclosed if fees received in advance are substantial.
- **GST Implications (if applicable):** - If GST (Goods and Services Tax) is applicable, similar principles apply for recognition and payment.
### Conclusion:
Implementing accrual basis accounting for fee collection allows for more accurate matching of income and expenses. It ensures that the financial statements reflect the true financial position and performance of the coaching institute. However, it's crucial to consult with a qualified accountant or tax advisor to ensure compliance with applicable accounting standards (like Indian Accounting Standards) and tax laws (like Income Tax Act and GST Act) based on your specific circumstances and jurisdiction.
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