GUIDANCE NOTE ON BOOK-KEEPING AND ILLUSTRATIVE CHART OF ACCOUNTS (First Edition – June 2021)

Pre-requisites to do book-keeping:

1. Basic Principles of Book-Keeping – Dealt in this document

2. Basic knowledge of Goods & Services Tax (GST) – To be dealt separately
3. Basic knowledge of TDS & TCS Provisions – To be dealt separately

Essential qualities of a book-keeper:

1. Care for accuracy

2. Attention to detail
3. Curiosity

Key Concepts:

1. Know the different types of accounts. The following are the broad types of accounts:

Type of account Meaning Examples

Equity Equity is the difference between the assets and liabilities. It shows Owner’s Capital, Reserves and Surplus
how much the business is worth.
Liabilities Liabilities represent what the entity owes to outsiders. Loans, Creditors, Tax Payable
Assets Assets are resources owned by the that have monetary value Plant and Equipment, Bank balances,
Debtors
Revenue/Income Revenue is the amount of money the business earns by selling its Sales of goods, Provisions of services,
products or services. Other income may include income from Dividends, Interest
dividends, interest income from FDs
Expenses Expenses refer to the costs incurred in the process of running your Purchase of materials, Rent, Electricity,
business. Professional Charges
2. Fundamental rules of accounting

(a) For recording changes in Assets/Expenses (Losses):

• Increase in asset is debited, and decrease in asset is credited.
• Increase in expenses/losses is debited, and decrease in expenses/ losses is credited.

(b) For recording changes in Liabilities and Capital/Revenues (Gains):

• Increase in liabilities is credited and decrease in liabilities is debited.
• Increase in capital is credited and decrease in capital is debited.
• Increase in revenue/gain is credited and decrease in revenue/gain is debited.

3. Principles:

a. Matching Concept

The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue
earned during that period. The matching concept emphasizes exactly on this aspect. It states that expenses incurred in an accounting period should be matched
with revenues during that period. The principle is at the core of the accrual basis of accounting, which is discussed next.

To understand the matching concept, consider the following example. In India, the accounting period usually followed is from April – March. Now, assume a
salesman earns a 5% commission on sales shipped and recorded in March. The commission of Rs. 50,000 is paid in April, which falls in the next accounting
period. The commission has to be recorded in the month of March itself since the related revenue has been earned in March.

Another example of matching concept is prepaid expenses. For example, consider vehicle insurance of Rs. 12,000 being paid in January for 12 months. In the
books, vehicle insurance for Rs. 3000 shall be booked as insurance expense and the balance of Rs. 9,000 as prepaid expense. Rs. 9,000 shall be charged to
expenses in the subsequent financial year.
b. Accrual Basis

Under accrual basis of accounting, revenues and costs are recognized in the period in which they occur rather when they are paid. A distinction is made between
the receipt of cash and the right to receive cash and payment of cash and legal obligation to pay cash.

Under this system, the monetary effect of a transaction is taken into account in the period in which they are earned rather than in the period in which cash is
actually received or paid by the enterprise. This is a more appropriate basis for the calculation of profits as expenses are matched against revenue earned in relation
thereto. For example, salary for the month of March, though paid in April, is booked as an expense and recognized as a liability in the month of March itself.

c. Inventory

Inventories are assets:

(a) held for sale in the ordinary course of business; (i.e. finished goods)
(b) in the process of production for such sale; (i.e. work in progress) or
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials).

Inventories are usually expected to be converted into cash within 12 months. Inventory is valued at lower of cost and Net Realisable value (Estimated sales prices
– Estimated costs of completion and expenses to make the sale)

Please note that what constitutes inventory for a business depends on the nature of the business. For example, for a manufacturer of coir machinery, such machinery
will be inventory and not fixed assets.

d. Fixed Assets

A fixed asset is a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income. Fixed assets are not expected
to be consumed or converted into cash within a year.
 It is very important to understand whether an expenditure needs to be booked as a revenue expenditure (charged to Profit and Loss account) or capitalized in the
Balance Sheet as fixed asset. If the latter, the entity will be eligible to claim depreciation.As a thumb rule, any expenditure upto Rs. 5,000 can be charged to Profit
and Loss account.

4. Normal balances for each types of account:

a. Assets must have debit balances.
b. Liabilities and equity must have credit balances.
c. Revenues and Incomes must have credit balances
d. Expenses must have debit balances.

5. Ascertain the entity type. The following are some of the common entity types:

a. Sole Proprietorship
b. Partnership
c. Company
d. LLP
e. Trust
f. Society

6. Basics of GST:

a. GST is a value added tax levied on supply i.e. manufacture or sale of goods and provision of services.

b. GST paid on input goods and services can be utilized to offset GST payable on output. For example, assume that you are a trader.
You had purchased the product for Rs. 1,00,000. GST on this at 18% is Rs. 18,000/-. This is the input tax credit available to you.
Now, if you want to sell the product for Rs, 1,50,0000. GST on such sale at 18% would be Rs. 27,000. This represents your output tax liability.
The tax that needs to be paid to the government is only Rs. 9000 (Rs. 27000-Rs. 18000)
c. There are certain goods and services on which input tax credit cannot be taken. In such cases, the ITC is added to the cost of the goods or services purchased.
For example, in S.No.b, if ITC was not eligible, then the cost of the product would have been Rs. 1,18,000/- and not Rs. 1,00,000. Also, you would have had
to pay the entire output tax liability of Rs. 27,000/-.

d. GST is further divided into three - Central GST (CGST), State GST(SGST) and Integrated GST (IGST)

CGST and SGST are applicable in case of intra-state (within the state) supply. IGST is applicable in case of inter-state (between different states) supply.
If the GST rate for goods/services is 18%, it has to be understood as follows:

• In case of intra state supply, 9% each to CGST and SGST

• In case of inter-state supply, entire 18% has to be accounted for as IGST

e. Follow the below procedure for Set off:

• Adjust input IGST against output IGST
• Balance of input IGST can be used to offset either output CSGT or Output SGST
• Ensure that the entire input IGST is exhausted before proceeding with the next steps.
• Use Input CGST to offset output CGST.
• Use Input SGST to offset output SGST.
• Excess of Input SGST and Input CGST can then be used to offset output IGST
Please note that Input SGST cannot be utilized to offset output CGST. Similarly, input CGST cannot be used to offset Output SGST.
f. Threshold for obtaining GST Registration in Tamil Nadu:
• For services – If annual turnover exceeds Rs. 20 lakhs
• For goods – If annual turnover exceeds Rs. 40 lakhs
7. Expenses/Income should always be routed through the vendor and customer accounts. Do not book any cash or bank entry directly without routing through the
party’s account.
Incorrect: Purchases A/c Dr.
To Cash A/c

Correct: Purchases A/c Dr.

To A A/c
(Being goods purchases)

A A/c Dr.
To Bank a/c
(Being payment for the goods purchased made)

8. Balances of Prepaid Expenses ledgers in the previous year must be duly transferred to the respective expenses account in the current year. Similarly, when
payments for outstanding expenses of the previous years is made during the current year, they should be set off against the existing liability accounts. Fresh
expenses for the current year should not be debited since these expenses do not pertain to the current year.

For example, rent payable for March 2021 had an outstanding balance of Rs. 50,000. The payment for this is being made in April 2021.

Incorrect: Rent a/c Dr.

To Bank account

Correct: Rent payable a/c Dr.

To Bank account
9. Please be mindful of the following while recording transactions in cash. The following are not allowed as per the provisions of the Income Tax Act, 1961.

a. No payment of expenses in cash (individually or in aggregate) exceeding Rs. 10,000 to a single person in one day. [Section 40A(3)]
e.g. Two cash payments, one for Rs. 5000 and another for Rs. 5000, to Mr. A for repairs to buildings on a single day is not allowed.

b. No borrowing of loan exceeding Rs. 20,000 in cash. [Section 269SS]

c. No repayment of loan exceeding Rs. 20,000 in cash. [Section 269T]

d. No receipt of cash of Rs. 2,00,000 or more from a single person in one day. [Section 269ST]

e. No receipt of cash of Rs. 2,00,000 or more in respect of a single transaction. For example, Mr. A issued invoice of Rs. 5,00,000 to his customer on June 23,
2021. The customer intends to make payment in cash in next 10 days for Rs. 50,000 each. This is not allowed under Income Tax Act, 1961. [Section 269ST]

f. No receipt of cash of Rs. 2,00,000 or more in respect of transactions relating to one event or occasion from a person [Section 269ST]. Please consider the
following example:

S.No. Particulars Whether allowed? Reasons

Mr. X receives gift of Rs.1,000 each in cash from 200
1 Yes None of the person gifted Rs.2 Lakh or more in cash.
persons on the occasion of his marriage.
Mr. X receives gift of Rs.1,11,000 from his uncle on the As the total cash receipt from a person relating to
2 No
marriage day and Rs.1,51,000 on the day of reception. occasion ‘marriage’ exceeds Rs. 2 Lakh
Mr X’s uncle gifted Rs. 1,70,000 to him and Rs. 81,000 to Not received from a single person - Rs.2 Lakh or
3 Yes
his mother in cash more in cash.

10. Ensure that the balance in Fixed Assets Register tallies with the balance in book-keeping software.
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

1. Please ascertain the entity type.
Share Capital/ Partners
2. For partnership firms and LLPs, ensure that the capital
Capital/Proprietor's Equity Capital Credit
contribution is as per the partnership deed. Maintain
Capital account
separate capital account for each partner.

1. Exclusively applicable for proprietorships.

Proprietor's Current
Equity Capital Credit 2. All transactions with the proprietor apart from capital
Account
contribution and withdrawal are recorded in this account.

1. Exclusively applicable for partnership

Partners' Current 2. All transactions with the partners apart from capital
Equity Capital Credit
Account contribution and withdrawal are recorded in this account.
3. Maintain separate current account for each partner.

1. This usually represents the accumulated profits/(loss)

of the business.
2. Maintain different kind of reserve accounts depending
Retained earnings/
Equity Retained earnings Credit/ Debit on the nature. For example, in case of companies,
Reserves and Surplus
securities premium might be applicable. This should not
be clubbed with balance of profit and loss account.
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

1. Obtain loan statement from the client.
2. EMI payments have to be segregated between
principal and interest. This account should contain only
Loan accounts Non-Current Liabilities Loan Credit
principal repayments.
3. If unsecured loan from a relative/acquaintance, obtain
declaration to confirm year-end balance.
Deferred Tax
Non-Current Liabilities Deferred Tax Credit Applicable only in case of companies
Liabilities
Bank Overdraft Current liabilities Trade Payables Credit Tie with the bank statement.
1. Maintain separate account for each creditor
Trade Payable Current liabilities Trade Payables Credit 2. For large creditors, obtain confirmation of balances at
the end of the year.
Advance from Credit balances in Trade Receivables must be re-
Current liabilities Other current liabilities Credit
Customers classified to Advance from customers
1. Ensure that salary for every month is accrued at the
end of the month.
Salary Payable Current liabilities Other current liabilities Credit
2. Ensure to book salary for the month of March before
closing books of accounts.
Wages Payable Current liabilities Other current liabilities Credit
Rent Payable Current liabilities Other current liabilities Credit 1.Ensure that these expenses for the month of March are
Electricity Charges duly accrued.
Current liabilities Other current liabilities Credit
Payable
Output GST Current liabilities Other current liabilities Credit
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

1. Monthly balance must match with GST returns and
GST cash and credit ledgers.
2. Ensure that set-off entries for adjusting eligible ITC
GST Payable Current liabilities Other current liabilities Credit
are passed on a monthly basis.
3. Maintain separate accounts for CGST, SGST and
IGST.
PF Payable Current liabilities Other current liabilities Credit Tie with monthly PF challans
1. Please tie with the monthly payment challans. Tat the
end of the year, this account should ideally have only the
TDS Payable for March.
TDS Payable Current liabilities Other current liabilities Credit
2. For ease of tracking, maintain separate accounts for
each type of payment - e.g. TDS on rent, TDS on
salaries, TDS on contractors etc.
Accrue for the second half year (October - March). The
Professional Tax
Current liabilities Other current liabilities Credit payment for the same is made in the month of April
Payable
which falls in the subsequent FY

1. This should match with the financial statements.

Provision for Income
Current liabilities Other current liabilities Credit 2. Ensure that after the end of the year when income tax
Tax
payment is actually made, this account is duly closed.
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

Maintain separate accounts for each class of assets.

However, ensure that assets of similar nature are grouped
Property, plant and together to avoid duplicity of accounts.
Fixed Assets Non-Current Assets Debit
equipment
For example, both computers and laptops can be clubbed
into a single head

Accumulated Property, plant and

Non-Current Assets Credit
Depreciation equipment
Deferred Tax Assets
Non-Current Assets Deferred Tax Debit
(Net)
Cash on Hand Current assets Cash and cash equivalents Debit
Must tie with the bank statements. In case of difference,
Cash at Bank Current assets Cash and cash equivalents Debit
prepare reconciliation.
Petty cash account Current assets Cash and cash equivalents Debit
1. Maintain separate account for each debtor
Accounts receivable Current assets Trade receivable Debit 2. For large debtors, obtain confirmation of balances at
the end of the year.
Provision for bad and
Current assets Trade receivable Credit
doubtful debts
Raw materials Current assets Inventory Debit
1. Obtain stock statement from the client at the close of
Work in progress Current assets Inventory Debit
year before finalising books of accounts.
Finished goods Current assets Inventory Debit
Prepaid Insurance Current assets Other current assets Debit
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

1. Tie with advance tax challan
Advance Tax Current assets Other current assets Debit 2. Ensure that this account is duly closed once the
income tax for the year has been paid.
1. Monthly balance must match with GST returns and
GST cash and credit ledgers.
2. Ensure that set-off entries for adjusting against output
Input GST Current assets Other current assets Debit
tax liability are passed on a monthly basis.
3. Maintain separate accounts for CGST, SGST and
IGST.
TDS Receivable Current assets Other current assets Debit Tie with Form 26AS at the end of the year.
Rent Advance Current assets Other current assets Debit
Salary Advance Current assets Other current assets Debit
Credit balances of Trade Payables must be reclassified
Advance to Supplier Current assets Other current assets Debit
under this head.
Sales Income Revenue Credit
Purchases Cost of sales Cost of sales Debit
Freight Inwards Cost of sales Cost of sales Debit
Wages Cost of sales Cost of sales Debit
Advertisement Expense Sales and marketing Debit Check for TDS Compliance
Salary Expense General and administrative Debit
Employer's This should both employer's contribution to EPF and
Expense General and administrative Debit
Contribution to PF EDLI Charges
Staff Welfare Expenses Expense General and administrative Debit
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

Training costs Expense General and administrative Debit

Professional Tax is paid twice in a year in half yearly

instalments.

Professional Tax for April - September is paid by

Professional Tax Expense General and administrative Debit
October 31 and for October - March is paid by April 30.

Ensure that professional tax for both the half-years are

duly recorded.

Bonus Expense General and administrative Debit

Rent on buildings Expense General and administrative Debit
1. Check if rent paid is in accordance with the rent
Rent on plant and agreement.
Expense General and administrative Debit
machinery 2. Check for TDS compliance

Insurance Expense General and administrative Debit

Electricity Expense General and administrative Debit Check if expenses are booked for all the 12 months.
Fuel Expense General and administrative Debit
Printing, Stationery
Expense General and administrative Debit
and Office Supplies
Postage & carriage Expense General and administrative Debit
Telephone Expense General and administrative Debit Check if expenses are booked for all the 12 months.
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

Equipment repairs and
Expense General and administrative Debit
maintenance
Building repairs and Ensure that no items that needs to be treated as assets are
Expense General and administrative Debit
maintenance booked under these heads.
Vehicle repairs and
Expense General and administrative Debit
Maintenance
Registration and Taxes Expense General and administrative Debit
Travelling Expense General and administrative Debit

1. Compute depreciation as per Income Tax Act, 1961

Depreciation Expense General and administrative Debit for all entities except companies.
2. For Companies, calculate as per the provisions of the
Companies Act, 2013.
Amortization Expense General and administrative Debit
Legal fees Expense General and administrative Debit
1. Check for TDS compliance.
Audit fees Expense General and administrative Debit 2. Audit fees for the year must be accrued at the end of
Consultancy fees Expense General and administrative Debit the current year before finalisation of books of accounts
Bad debt expense Expense General and administrative Debit
Donations Expense General and administrative Debit
Subscriptions Expense General and administrative Debit
Interest expense Expense Finance costs Debit
Bank Charges Expense Finance costs Debit
 ILLUSTRATIVE CHART OF ACCOUNTS

Account Name Group Sub-Group Balance Key Considerations

Gain on sale of assets Income Other Income Credit

Loss on sale of assets Income Other Income Credit

Interest income Income Other Income Credit
Rent income Income Other Income Credit
Income tax expense Expense Income tax expense Debit This should match with the financial statements

Temporary account for transactions that need clarity

Suspense account
from client. Must be closed at the end of every month.