Accounting Tips for Small Businesses

iptu-300x200If you have a startup business or you are in the process of setting up a new business then it is important that you integrate accounting in your processes from the first day. This helps your business maintain accounts of your everyday financial activity. Keeping your accounts on a day-to-day business helps you monitor your new business more closely and more effectively.

 

Many entrepreneurs make the folly of thinking about accounting only at the end of a financial quarter or year. It is advisable that the services of a competent accountant who maintains the books of your business should be taken right from the beginning of your business. Hiring a person who knows accounting is not very expensive. It is also advisable that the business should make use of accounting software or a cloud based accounting software for managing its accounting.If you are an entrepreneur (or intend to be one) it is necessary that you understand the basics of accounting. It will help you in understanding the financial aspect of your business. You should be able to understand the three basic financial statements that are absolutely necessary for any business worth its salt. These financial statements are: profit & loss statement, balance sheet and cash flow statement. There are many training consultancies in India that conduct very short duration accounting courses for entrepreneurs.

 

A few other things that an entrepreneur needs to keep in mind. Firstly, the accounts of the business should be kept separate from the personal accounts of the owner or entrepreneur. Secondly, while raising financing for the business, the entrepreneur should tap the entire gamut of financing sources available. With the advent of new financing avenues like crowd-funding, the financing sources available for an entrepreneur have increased substantially. By exploring all the available financing options, an entrepreneur can raise financing for the business at the lowest costs possible and on more favorable terms.

 

An entrepreneur should understand the difference between profit and cash flows. A company can be profitable on paper but may suffer from poor cash flows. It is therefore necessary that an entrepreneur manages the business in such a way so that it generates enough cash flows to be able to meet its expenditure needs. Better negotiation with customers and suppliers can considerably reduce the cash flow problems of a new business. Negotiation skills are very important if you are an entrepreneur or owner of a new, budding business. Of course understanding of the basics of accounting is equally important!

Blue Book, Red Book, Green Book & IFRS

international-finance International Accounting Standards are globally accepted accounting standards which are issued by International Accounting Standards Board (IASB). The International Accounting Standards Committee (IASC) has regularly issued international accounting standards on various aspects of financial reporting and accounting.From 2000 onwards the international accounting standards have been renamed as International Financial Reporting Standards (IFRS).

 

The IASB publishes its accounting standards every year in the form of three books: red book, blue book and green book. The red book contains all the IFRS standards that have been published till 1st January of the year to which the particular red book refers to. It omits those IFRS standards that are being withdrawn or are being replaced by a new standard.The blue book issued in a particular year contains only those standards which have become effective by 1st January of that year. So, for instance the blue book of the year 2015 will contain only those IFRS standards that have become effective by 1st January 2015. If a newly issued accounting standard is to become effective by 1st April, 2015 then the blue book of 2015 will not contain that standard.

 

The green book of a particular year contains those standards which have been issued by 1st July of that year. For instance the green book of the year 2015 will contain all the standards that have been issued till 1st July 2015. It will also include those standards which have been issued by 1st July 2015 but will become effective after it. The IASB started publishing green book, from the year 2007 onwards.The aim of publishing these three books annually is to keep the accounting and financial world informed about the latest IFRS standards.

 

The world is converging towards adoption of one set of accounting standards, represented by IFRS. A common accounting standard globally is one of the needs of the globalized world. Many countries have already merged their national Generally Accepted Accounting Principles (GAAP) with IFRS. India too is moving towards adoption of IFRS. IFRS makes financial reporting easier, transparent and more relevant for all the stakeholders who use the accounting information given in financial statements.Knowledge of IFRS is therefore important for those working in the area of accounting and finance. There are many training consultancies in India today that provide IFRS training and certification.

 

IFRS: Entities that need to prepare their financial statements according to IFRS-converged standards, from April 2016

international-finance When we talk of convergence of accounting standards in India, it means convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS).

 

IFRS are the accounting standards of International Accounting Standards Board (IASB). One of the major commitments of G-20 is to implement common IFRS standards across the globe. G-20 is the group of 20 biggest economies in the world.Globalization has resulted in increased economic integration between countries. This integration demands a common accounting standard across the world. Convergence of local accounting standards with IFRS is a step in this direction.

 

The government of India and Institute of Chartered Accountants of India (ICAI) support the convergence of Indian Accounting Standards with IFRS. The IFRS converged Indian accounting standards are known as Ind AS.According to ICAI the following entities should prepare their financial statements according to IFRS-converged standards from April 1st 2016 onwards:

  1. All companies whose stock or debt is listed at a stock exchange. The exchange of listing can be Indian or foreign.
  2.  

  3. All banking companies, insurance companies, mutual fund companies and financial institutions.
  4.  

  5. All unlisted companies having net worth of more than Rs. 500 crore.
  6.  

  7. All businesses whose borrowing from banks, financial institutions or through deposits from public exceeds Rs. 20 crore at any point in the immediately preceding financial year.
  8.  

  9. Every business or joint venture of a company that is a subsidiary of an entity that is required to prepare financial statements according to IFRS-converged standards.

 

The original plan was to implement IFRS-converged standards by April, 2011 but that plan had been delayed mainly because of lobbying from various industry bodies.The convergence with IFRS in India may marginally bring down the cost of capital for Indian businesses that try to raise capital from abroad. Foreign investors and lenders consider it an additional risk when a company is not following IFRS for preparing its financial statements. The convergence of IFRS with Indian accounting standards will improve the quality of corporate governance in Indian companies because the quality of financial reporting will improve.

 

Attracting foreign direct investment (FDI) in the country is a priority of the new Indian government that took charge in May last year. Therefore it is likely that unlike in the past, the implementation of IFRS-converged standards will not be delayed this time.

 

Why is knowledge of IFRS important for those working in the field of Accounting?

international-finance
India is looking to adopt International Financial Reporting Standards (IFRS) by April 2015.The Institute of Chartered Accountants of India has prepared the roadmap for complete adoption of IFRS by Indian companies.

 

In the first phase of implementation, which will begin from April this year, companies with net worth of more than 1000 crore will adopt IFRS. Adoption of IFRS means that these companies will have to prepare their accounts and financial statements as per IFRS.The second phase of implementation will begin from April 2016. In this phase listed and unlisted companies with net worth between 500 crore and 1000 crore will have to adopt IFRS in the preparation of their accounts and financial statements. Once the second phase is over, complete adoption of IFRS will be rolled out for all companies.

 

The IFRS standards have already been adopted by more than 135 countries. Adoption of IFRS in India will make accounting more transparent. The IFRS’ disclosure norms are more stringent than Indian Accounting Standards (Ind ASs) norms. One area in which IFRS and Ind ASs differ considerably is mark-to-market valuation of financial assets. The IFRS requires that all financial assets should be valued at their existing market value (IFRS Code 13). Another area is that of recognition of revenue by real estate companies. Under Ind ASs real estate companies recognize revenue as soon as the buyer signs the purchase contract. Under IFRS real estate companies can only recognize revenue after the buyer gets possession of the property.

 

The objective of IFRS is to improve the quality of accounting and to create a seamless global accounting framework that can cater to the needs of globalization. Indian companies, like Infosys, which are also listed at foreign stock exchanges like Nasdaq, already prepare their financial statements as per IFRS.The quality of financial reporting by Indian companies will improve significantly after the adoption of IFRS. This will improve corporate governance and will be beneficial for all the stakeholders. IFRS requires companies to prepare balance sheet (statement of financial position), profit & loss statement (statement of income), cash flow statement and statement of changes in equity.

 

For those working in the area of Accounting, knowledge of IFRS standards is much needed so that they do not become irrelevant once India adopts IFRS standards completely. Training in the application of IFRS standards will enhance their employability considerably.

 

IFRS (International Financial Reporting Standards)

ifrs International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).

 

 

The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.

 

 

Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances.

 

 

Currently, over 100 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. Proponents of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the potential for compliance to improve credit ratings.

 

 

IFRS is sometimes confused with IAS (International Accounting Standards), which are older standards that IFRS has replaced.