Question

1. What is the difference between accrual basis and cash basis of accounting?

2. Which financial statement will allow you to determine the Gross Margin or Net Margin ?

3. How is time defined between Balance Sheet and Income Statement?

4. How is Fixed Assets and Current Assets defined?

5. Why do we need to prepare the Cash Flow statement when we have Income Statement?

6. What impact does Tax have in the Financial Statements?

Answer 1

1. In accrul basis of accounting , revenue is  recognized when that is earned and expenses recognized when those are consumed . The revenue generated and the costs consumed to earn the revenue are recognized in the same period irrespective of timing of therr payments. Actual payment or receipt of cash has no relation with the recognition.

In cash accounting a revenue is recognized when cash is received for sale and expense is recognized when cash payment is made for the expense.

2. Gross Margin and Net Margin are determined in the Income Statement or the Proft Loss Account.

3. Time is Balance sheet: Balance Sheet is made 'as on a particular date ( the closing date of the Balance sheet period).

Income Statement is made 'for the period from ----- to -------- ( shows the specific range pf period of the statement)

4.

Current Assets are short term assets that are used up within a period of less than a year. Current assets are used for the day to day operations to keep it running.

Fixed Assets are Long term assets that are used by the company to generate income for a long time. Fixed assets are not used up within a year like the current assets. Fixed Assets are also called non current assets and subjct to depreciation based on the asset class and depreciation rules.

5. Cash flow statement shows the change in cash position during the reporting period. The Income statement shows the net income for the period, but that income is calculated on accrual basis. A lot of accruals and deferrals are adjusted to reach the net income, so net income is not equal to cash generation. Apart from that cash position also changes due to change in working capital, change in investments and change in equity postions, which are found in the Balance sheet details. All the factors taken together and adjusted for non cash items give the Cash flow statement. That is the reason a separate cash flow stateement needs to be prepared in addition to the Income Statement.

6. Tax as per the applicable rule needs to be calculated on the Taxable income . Tax on income reduces the Earning before Tax to get net Income after Tax. The remaining amount of net income after paying dividend is transferred to retained earning in Equity section of Balance sheet.

The Tax expense as per income statement and Tax payable as per Income TAx rules often vary due to some differences in Income Tax and Accouting rules , that generate Deferred Tax Assets or Liabilities that are part of Balance Sheet .