I asked this already to a CA who told me I am wrong, but did not explain in detail. Please help.
Let's assume: I am a sole proprietor starting a new business. And:
* Starting assets: 9 lakh cash
* Trading 30 days/year
* Everyday of trading, 9 lakh is paid out as expenses, and 10 lakh is deposited as revenue by end of day. Thus, profit of 1 lakh per trading day.
* Tax rate: 30% flat
Under these assumptions, after 30 days of trading, my income statement and balance sheet would look like this (whether under cash basis or accrual basis):
* Revenue: 300 lakh
* Cost: 270 lakh
* Profit: 30 lakh
* Tax owed: 9 lakh
* Assets: 39 lakh cash
* Liabilities: 0 lakh
Now after 30 days of trading, on the last day of the financial year, I buy inventory worth 39 lakh. Then under cash basis my income statement looks like:
* Revenue: 300 lakh
* Cost: 309 lakh
* Profit: -9 lakh
* Tax owed: 0 lakh
But under accrual basis it remains unchanged (since inventory not sold, cost of goods is not incurred), so I still have to pay 9 lakh as tax even though I have no cash. Whereas under cash basis, I can carry a loss of 9 lakh into my next tax return.
The CA said something like closing stock should be considered, so tax is still payable on 30 lakh. I didn't understand fully, as I am not an accounting expert. I though under cash basis, income is simply net cash gained in the year. According to you, what should income statement look like at end of year, under cash basis?
CAclubindia
