Tax incentives are provisions in the tax code designed to encourage certain economic activities. They can take many forms, including exemptions, deductions, credits, and preferential tax rates. Governments can need tax incentives to promote economic development, support specific industries, and encourage innovation.

There are two ways for small businesses in India to get tax, interest, and credit benefits from the government:

1. Registration under the Startup India Action Plan (SIAP) through the Department for Promotion of Industry and Internal Trade (DPIIT)
2. Udyam Registration Portal by Ministry of Micro Small and Medium Enterprises

Udyam Registration does not provide any specific tax benefits for businesses. However, it may give some tax benefits depending on the nature of the business. Read about these incentives in detail below.

Udyam Registration Portal

The Udyam Registration Portal is an online platform that allows startups to register with the government and access the benefits and support measures provided by the Central Government of India. The portal is open to all startups that meet the eligibility criteria. In addition, the portal includes a private limited company, partnership firm, or limited liability partnership operating for less than seven years. To register on the portal, startups must provide details about their business, including their products or services, target market, and growth plans.

Startup India Action Plan (SIAP)

The Startup India Action Plan is a government initiative launched in 2016 to promote and support the growth of startups in India. The initiative provides a range of support measures to help startups get off the ground, including access to funding, mentorship and networking opportunities, and regulatory support. One of the critical ways the Startup India Action Plan helps startups is through tax incentives.

Tax Benefits under SIAP

The Startup India Action Plan provides tax benefits to eligible startups. These include income tax exemptions on profits for up to 7 years, capital gains tax exemptions, and tax deductions on expenditures incurred on research and development. These incentives can help startups retain more of their profits, invest in growth and expansion, and reduce the overall tax burden on the company.

Tax exemption under Section 80IAC of the Income Tax Act 1961 (IT Act)

Eligibility

1. Must be recognised as an eligible startup by the DPIIT
2. Must meet the conditions in Section 80IAC of the IT Act.
3. Must obtain a certificate from the Inter-Ministerial Board by submitting Form I with supporting documents.
4. The Inter-Ministerial Board may review the application and either grant a certificate or reject it.

Benefits

1. An eligible startup can claim a deduction of 100% of its business profits for three consecutive assessment years out of five years starting from the year incorporated the startup. 
2. This deduction can be claimed for any three consecutive assessment years in five years starting from the year the eligible startup is incorporated.

Tax on Employee Stock Options (ESOPs) deferred for eligible startups under section 156(2) of the Income Tax Act 1961

Eligibility

1. Must be recognised as an eligible startup by DPIIT.

Benefits

1. Can defer Income tax on ESOPs from the time they exercise them.
2. From the financial year 2020-21, the TDS will not be deducted, nor the tax is paid when filing an Income Tax Return for the year the ESOPs were allotted.
3. The tax liability for ESOPs arises within 14 days from
   1. The end of the relevant assessment year (48 months after the end of the assessment year)
   2. The date the employee sells the ESOP shares
   3. The date the employee stops working for the company allotted the ESOPs
4. The startup’s liability to deduct tax at source (TDS) on the ESOPs is also deferred.

Angel tax exemption under section 56(2)(viib) of the IT Act

Eligibility

1. The company must be an eligible startup by DPIIT.
2. The company must be a private or public company or limited liability partnership (LLP) on or after April 1, 2016, and before March 31, 2023.
3. Paid-up share capital and share premium after issuing or proposing to issue shares is less than INR 25 crore.
4. Has not invested in any assets listed in clause 4(iii) of the G.S.R. notification 127 (E) for seven years from the latest financial year’s end in which shares were issued at a premium.
5. Must file a declaration in Form 2 with DPIIT seeking exemption from section 56(2)(viib) before issuing shares. This declaration is forwarded to the CBDT(Central Board of Direct Taxes) for approval.

Benefits

1. Section 56(2)(viib) of the Income Tax Act (IT Act) levies a tax on your private company. Taxing occurs when it issues resident shares at a value above the fair market value of the shares. This tax is considered “income from other sources”.
2. This tax is exempt for eligible startups that meet certain conditions.

Availing Tax Exemptions under Section 80-IAC of the IT Act:

Startups registered on the Udyam Registration Portal and meeting the eligibility criteria can avail of tax exemptions under Section 80-IAC of the Income Tax Act. This provision allows startups to claim exemptions on their profits for up to 7 years. To claim the exemption, startups must apply to the DIPP (which means Department of Industrial Policy and Promotion) and provide evidence of their eligibility. 

The Inter-Ministerial Board setup by the DIPP validates Startups for granting tax-related benefits. The Board comprises the following members:

1. Convener,(Additional Secretary, Department of Industrial Policy and Promotion)
2. Representative of Ministry of Corporate Affairs, Member
3. Representative of the Ministry of Electronics and Information Technology, Member
4. Representative of the Department of Biotechnology, Member
5. Representative of the Department of Science & Technology, Member
6. Representative of Central Board of Direct Taxes, Member
7. Representative of Reserve Bank of India, Member
8. Member (Representative of the Securities and Exchange Board of India)

Documents required to apply through the Form-1 for the tax exemptions under section 80-IAC of the IT Act are

1. Copy of Memorandum of Association and Board Resolution (if any)
2. Copies of Annual Accounts (Updated financial statements – Balance Sheet and Profit & Loss statement, certified by CA – for the last three financial years
3. Copies of income tax returns for the last three financial years
4. Updated Pitch deck and Video

Availing Angel Tax Exemption under Section 56(2)(viib) of the IT Act:

The Angel Tax Exemption is an Income Tax Act provision allowing startups to claim exemptions on investments received from angel investors. To avail of this exemption, startups must be registered on the Udyam Registration Portal and meet the eligibility criteria, which include being a private limited company or a limited liability partnership that has been in operation for less than seven years. In addition, startups must also provide evidence of the investment received from the angel investor, such as a copy of the investment agreement.

Subject to the fulfilment of additional prerequisites, a qualified startup must file a legally signed statement in Form 2. The DPIIT shall transmit such declaration to the CBDT upon receipt. Other documents needed are

1. Form of the declaration on letterhead;
2. Section 140 of the IT Act requires the declaration to be digitally signed by a person authorised to verify the return of income.

The Startup India Action Plan is a valuable resource for startups in India, providing a range of support measures, including tax incentives, to help them grow and succeed. By registering on the Udyam Registration Portal and availing of the tax exemptions and deductions provided under the initiative, startups can reduce their overall tax burden and retain more profits to invest in growth and expansion.

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Difference between profit maximisation and wealth maximisation

Understanding the difference between profit maximisation and wealth maximisation, requires understanding the concepts of profit and wealth.

Wealth relates to and reflects your whole financial condition and net worth, whereas profit refers to the amount of money you make on an investment or business enterprise.

Increasing profits is always a desirable thing. However, there are some circumstances where raising earnings and relying primarily on them could be harmful to the company’s health and, in the long term, negatively impact total wealth.

Profit maximisation and wealth maximisation are the two main goals of financial management. As the name suggests, profit maximisation refers to increasing a company’s profits, whereas wealth maximisation strives to raise an entity’s value.

Because profit serves as a gauge of efficiency, maximising profit is the company’s primary goal. On the other hand, the goal of wealth maximisation is to increase the stakeholders’ value.

What is Profit Maximisation in Financial Management?

For any business that seeks to maximise its earnings, the profit maximisation principle is a crucial idea to comprehend. Finding the most profitable manner to produce goods or deliver services is profit maximisation in financial management. It simply means to increase the company’s profitability.

One of the most specific goals of every business is profit maximisation or maximisation of surplus value. In general, profit in accounting and business jargon refers to the portion of the money that remains after revenue surpasses the costs involved in production.

Here, cost refers to the money spent on production, while revenue refers to the money a business makes from selling its products and services. In other words, this profit can be viewed as the long-term net benefit received by shareholders from a corporation.

What is Wealth Maximisation in Financial Management?

Maximising wealth is something that both people and companies should strive to do. 

Profit maximisation is the goal of every business owner, even though wealth maximisation is the company’s goal.

In other words, wealth maximisation aims to increase the owner’s wealth, whose value is determined by the stock price. As a result, maximising wealth differs from maximising profit.

Profit Maximisation vs. Wealth Maximisation: Comparison Table

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Regular financial checks can keep you on top of your business affairs. You can use these insights to make proper decisions for the further growth of your company.

What is Financial Reporting

Financial reporting is the practice of reporting a company’s financial performance and information over a period of time, typically quarterly or annually. 

In financial reporting, companies record expenses, incomes, and other financial activities. The reports are generated using financial statements which help you gauge the direction in which the business is going in.

Businesses compile the data from different accounts to generate a comprehensive financial statement. Financial reports are made available for the stakeholders and the public to provide them with a good idea of the company’s financial situation as well as help them forecast its prospects. People who deal in stock markets can buy or sell shares based on this information.

Objectives of Financial Reporting

1. Track cash flow

You need to know the sources of income and expenses of your business. You also need to know whether your business is generating a profit or incurring a loss. These criteria are important to measure the success of your business. You will also get a fair idea of whether your business will break even or you will have to take loans to cover your expenses.

2. Providing information

When you have investors investing in your company, they have to know the financial status of your business to know how well their investments are being used. Financial reporting generates reports that give them the option to decide whether they wish to invest more in your company or withdraw their investments.

3. Analyse assets and liabilities

Every company has a set of assets and liabilities. It is important to analyse them periodically and monitor any changes in them. These changes can affect the performance of your business. Financial reporting helps you understand what kind of performance you can expect from them and what you can do in case of future changes.

Documents Included in Financial Reporting

Financial reporting is done by generating various financial statements. These statements include the income statement, profit and loss statement, and balance sheet. There may be other disclosures detailing particular transactions. Some companies also issue cash flow statements. 

A company can display any or all of its financial statements on its website, which the investors and public can easily access.

Importance of Regular Financial Reporting

It is important to perform financial reporting regularly because of the following points:

1. It checks the income and expenses of your business

Tracking your funds is one of the most important parts of a business. Financial reporting allows you to monitor the income and expenses of your business. It is important to do this regularly for managing debt and allocating funds to appropriate areas. It also allows you to make plans on spending and borrowing.

Regular financial reporting also helps companies remain transparent about their financial dealings. Any investor can track a company’s assets and liabilities using its financial statements. Finally, financial reporting is necessary to measure business metrics which allow investors to check how their investments are being used and how a company is managing its debts.

2. It provides information to key people

Shareholders, high-level executives, and investors use financial reporting data to study the performance of a company and make further decisions. They use this data for making investments, planning budgets, and so on. A company must maintain transparency in its financial dealings so that the people involved can make the correct decisions. A company can invite further funding from investors only if they can show their performance accurately using financial reporting.

3. It ensures accounting compliance

Financial reporting includes using certain processes that all companies have to follow. These processes form a part of the mandatory accounting regulations. The financial reports generated by following these processes are presented in a particular format. This helps ease reading a report by any person in any financial or non-financial organisation. Financial reporting also helps you calculate taxes easily. It ensures your business follows tax regulations and other financial reporting regulations.

4. It supports financial analysis

Financial reporting allows you to analyse business decisions. Financial statements are used to study the performance of your business. They allow you to study important financial data. Financial statements like balance sheets and profit and loss statements help you analyse financial data over several years and identify areas of profit or loss. Financial reporting allows you to create a spending plan and make accurate forecasts about your company’s performance.

Different Types of Financial Statements

A document that shows the financial details and transactions of a company is called a financial statement. There are several financial statements generated in financial reporting. These statements are used by the company and the stakeholders to measure its performance. The government and accountants use these documents to calculate taxes.

There are four main types of financial statements:

1. Income statement

An income statement is also known as a profit and loss statement. It declares the company’s income, gains, expenses, and losses. The statement shows how much the company earned or lost during a certain period. It is useful for the shareholders to calculate how much the company’s net worth is.

2. Balance sheet

A balance sheet shows the total assets and liabilities of a company. It also includes your current equity status. A balance sheet can be used to quickly calculate assets minus liabilities. Usually, balance sheets are generated quarterly to evaluate the performance of a company. These reports may include the data of annual balance sheets as well. A balance sheet also allows you to calculate your current debt coverage and liquid asset.

3. Cash flow statement

A cash flow statement is used to measure the rate at which a company uses its funds to manage debts. It also shows how a company is generating income to support expenses. A cash flow statement can be analysed to study how efficiently the current revenue-generating practices are working, the spending patterns, and what can be done to generate more income.

4. Statement of earnings

Though a balance sheet shows the shareholders’ equity, larger companies might prefer to disclose this data on a separate statement. The statement includes the amounts the stakeholders and owners have invested in the company. It also includes the company stocks and securities, which generate income for the company.

Who Can Benefit From Financial Reporting 

Financial reporting is a process that allows businesses to analyse and review financial statements and make decisions that might affect the financial standing of the company. It also provides financial institutions with the proper documentation needed to analyse compliance, study debt management, and issue credit.

Several people and organisations study financial reports to assess the performance of a company. They are:

1. Investors and shareholders

Investors and shareholders hold a share of the company stock. Hence, they must have access to the financial statements to check the company’s performance and how the company uses funds to generate profits. 

2. Creditors

Creditors study the financial statements to analyse the ways by which a company can pay off its debts and offer credit to allow growth. They need to know if a company is worth offering credit to. 

3. Executives

Employees holding high posts in the company, usually managers and above, have a stake in the company stocks. These executives use the financial reporting statements to gauge the performance and improvise operations. Financial reporting also allows them to set new goals for the company and allocate departmental responsibilities.

4. Financial regulatory institutions

Regulatory institutions review the financial reporting statements at periodic intervals. The government and the Income Tax Department check the financial reports for compliance and to calculate tax.

5. Customers

When a company is completely transparent about its financial dealings, it helps maintain and develop a loyal customer base. If a company is involved in charitable activities, it is always better to be open about them to draw customers to your company.

6. Employee unions

Employee unions need to be provided with financial reporting statements to ensure that the workers are getting fair pay for their work. Employee unions can also decide whether working in a company is profitable for them or not by analysing financial statements.

Different Methods of Financial Reporting

There are three main ways of financial reporting. These methods ensure that the reports generated are standardised and easy to read across the world.

1. The GAAP (Generally Accepted Accounting Principles)

This system is used in the United States of America almost exclusively.

2. The IFRS (International Financial Reporting Standards)

This system is used in many countries, including India, China, and Australia. 

3. The GDPR (General Data Protection Regulation)

It is used since 2018 and is used to protect sensitive financial data.

Benefits of Financial Reporting

The benefits of financial reporting are as follows:

1. It improves debt management

A business must know the range of its debts. It is well-known that debts can crush a company if not handled properly. Financial reporting helps you track your assets and liabilities to gauge how many liquid assets you have and how you can manage debts using these assets.

2. It identifies financial trends

Every industry follows certain trends. Financial reporting statements help you analyse different trends in the past to predict the trends in the future. For example, if a certain event caused your sales to go up, you can predict that the sales will go up the next time the event occurs. Though this is a simplified example, it gives a rough idea of how financial reporting works.

3. It tracks your finances in real-time

Real-time financial reporting helps you take a critical decision in a short time. This is possible only due to the accurate reports you can get in real-time, which will give you a fair idea of the financial matters of your business.

4. It analyses liabilities

Liabilities are a part of all businesses. However, analysing financial reporting statements can decide how you manage the liabilities. For example, loans, credits from vendors, credit cards, etc., are some of the liabilities you might have. 

5. It helps in business expansion 

This is directly associated with analysing liabilities. If you wish to expand your business, it might be a good idea to analyse your abilities first. You can then decide whether you want to tackle the liabilities first or proceed with the expansion.

6. It ensures compliance

Financial reporting software generates accurate data that are completely GST-compliant. This is essential for the smooth running of a company. It also helps in calculating taxes and filing returns easily.

7. It analyses cash flow

Revenue generation and cash flow are very important to a business. It is essential to put the funds generated to maximum use. You can use the financial reporting statements to analyse cash flow and let it generate more funds by making proper investments.

8. It allows remote access

With the expansion of businesses into the worldwide web, it has become necessary for you to be able to study your business metrics on the go. Financial reporting software is now available on multiple devices that you can use to generate statements anywhere, anytime.

Limitations of Financial Reporting

Though financial reporting has many benefits, it has a set of disadvantages too:

1. Costs are calculated using historical data

Financial statements such as balance sheets contain the cost of assets and liabilities. These costs are recorded at the time they are purchased or loaned. However, assets and liabilities have costs that value over a period of time. While some of the costs are adjusted to include inflation or depreciation, fixed asset costs remain unchanged. This could lead to major calculation errors.

2. Inflation is not included

Every economy faces inflation. If the rate of inflation is high, but the costs of the assets remain unchanged, it could lead to a huge difference between the current values and the original costs.

3. Intangible assets are not included

Financial statements do not record intangible assets. The cost incurred to gain an intangible asset is recorded as an expense. This method of financial reporting can be harmful to start-ups and small businesses as they have a large quantity of intellectual property, but their sales are less.

4. Only specific times are considered

A user might consider the financial statements of a certain period and draw conclusions about the company’s financial health. There may be sudden peaks or dips in sales which do not reflect the company’s sales pattern.

5. Comparison may not be possible

Every company has a different method of generating financial statements. If someone wishes to compare the financial statements of two companies, it might not be possible as both are in different formats.

6. Fraud may go undetected

If there is too much pressure on the employees to perform better, they might resort to entering the wrong values just to get a bonus or a promotion. This causes major problems while auditing.

Conclusion

Financial reporting is an important aspect of a business. It allows you to study previous patterns and helps you predict future performances and make decisions accordingly. It is useful for owners, stakeholders, partners, and shareholders. 

Computerised financial reporting systems are now taking over the traditional manual version. These systems provide accurate and fast results and allow you to make quick decisions. They access bank data, address redundancies in ledger entries, and generate financial statements you can view at any time.

Using these financial reporting systems will help you make the right decisions to let your business grow and earn more profits.

Read more:

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Whether you are a multi-chain business, a large factory, a family run business or a kirana shop, chances are a part of your business is conducted on credit. Both creditors and debtors thus play an important role in shaping the business. In this article, let’s see who sundry creditors and debtors are and how such transactions are recorded in the balance sheet. 

Who are Sundry Creditors? 

Some businesses supply products and services to other businesses on credit basis. This means the products or services are supplied in advance, and the payment will be made a little later within the set period of time, say 15 to 90 days. 

Such businesses who provide the goods on a credit basis are called ‘Sundry Creditors’ to the receiving company. Since the buyer of the products needs to pay money to the seller, sundry creditors are considered a liability to the company, and they will be listed on the right-hand side of the credit side of the balance sheet. All such parties from whom the goods are bought on credit come under sundry creditors or accounts payable, which is another term used for a sundry creditor.

All sundry transactions come under the heading of accounts payable. There are multiple suppliers with different amounts and periods. To understand and analyse each sundry creditor, it is important to have a separate sundry creditor account for each supplier.

Examples of Sundry Creditors 

ABC is a stationary company that purchased Natraj pens and pencils worth INR 1 lakh on a credit basis on a 90 day credit period. It also purchased Faber Castle crayons and paints worth INR 50,000 on a 60 day credit period. Let’s see how ABC company records this transaction under the ‘Sundry Creditors’ section and treats it as a liability. 

The current liabilities section typically includes the total of the short term liabilities that need to be paid off in a short span. In the separate ledger for the sundry creditors, details about the creditors, the amount due, and the due date are mentioned.

Who are Sundry Debtors? 

Akin sundry creditors, where you owe money to other businesses, sundry debtors are those businesses who owe you money for the products they purchased from you. Sundry Debtors are an asset to your business as money will enter the business. They are hence mentioned on the left-hand side of the balance sheet under Assets. Sundry Debtors are also synonyms to Accounts Receivable as this is the money the business will receive in due course of time. 

Accounts Payable Explained 

• In simple words, accounts payable is the money you owe to someone. 
• Accounts payable is the total amount of money that the firm owes to a supplier or enterprise. Since the service has been provided and the money is yet to be received, accounts payable comes on the liability side of the balance sheet. 
• Since accounts payable is a dynamic account and keeps on changing every few weeks or months, they come under the Current Liabilities side of the balance sheet. 
• Businesses need to track their accounts payable section closely as this account affects the business’s cash flow. 

Importance of managing Accounts Payable 

Since Accounts Payable gives you a fair representation of the money owed by the business, it is very important to have good accounts payable management practices. It helps you understand when to make the payments and the remaining balance in due course of time. Since this involves a few steps, it can be tedious to do manually. 

Hence myBillBook does the job for you in just a few clicks. Once all your entries are entered on the myBillBook accounting software, it generates the different ledgers that need to be made and maintained. myBillBook understands the needs and requirements of small business owners and ensures the Accounts Payable ledger is managed efficiently and there is no delay in payments and cash flows. 

Whether you’re a business owner, accountant or you’re just starting off your business practice, understanding Sundry Creditors is very important. It helps you understand the everyday functions of a business and cash flow. Once you’ve got the hang of it you can concentrate on growing the business and conducting more business on credit to increase your inventory. 

Lastly, the accounts payable ledger does not need to be handled manually. With the help of cloud accounting softwares and the plenty of features available on myBillBook, your everyday accounting will be taken care of, giving you timely reports and analyses so you can make bigger business decisions. 

Outsourced Accounting Services
Integrated Accounting System
Importance Of Accounting
Guide To Business Accounting
Guide To Accounting Voucher
Guide To Accounting System
ERP Accounting
Contra Entry
E Commerce Accounting
Comparative Balance Sheet
Things Businesses Need to do Before the Financial Year End 2021-22

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What is the ledger balance in the savings account?

The ledger balance is also known as the current balance. Ledger amount meaning is the amount of money in a specific checking account at the beginning of each day, which remains unchanged throughout the day.

Your personal checking account’s ledger balance will be updated at the end of each business day after your transactions have been approved and processed. Next business day, your checking account balance will be updated.

What is the function of a Ledger Balance?

Ledger balances update when the bank processes transactions at the end of the working day and reflect a new opening balance for the next day. A ledger balance doesn’t change in real-time.

Banks are allowed by federal regulations to impose a hold on deposited cash for a specified amount of time before making them available for use. A pending deposit is a money on hold that has not yet been authorised for usage. Once the bank confirms receiving the funds from the payee, they’ll add them to your available balance. Withdrawals, wire transfers, and debit card activity are pending transactions.

Initial bank statement balances come from ledger balances. To maintain an accurate ledger balance, record all transactions after receiving the bank statement.

The importance of Ledger Balance

Understanding your ledger balance helps prevent overdraft charges, bounced checks, and inadequate funds for automated debits like bill payments. In addition, you must keep track of your ledger balance if you need to maintain a minimum bank account balance.

Financial planning involves checking ledger balances. This includes budgeting and understanding when to withdraw funds for big and small expenditures since funds aren’t accessible until they’re in your ledger.

To know your financial condition well, you must regularly examine your ledger balance.

What are the differences between Ledger Balance vs Available Balance

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The term MIS stands for Management Information System. It is an effective system that helps decision-makers make the right choice to grow their business. And MIS reports are one of the components of this well-organised system.

What is MIS Report?

An MIS report is a part of a management information system that provides summarised information about an organisation’s business operations. 

The report includes sales, profits, expenses, and other key business performance indicators. It also provides information on the status of key projects and initiatives. It helps managers make informed decisions about the company’s current and future direction.

What is the need for MIS?

There is a growing need for MIS in today’s business world. Here’s why:

• Decision Making: When making decisions, managers need to access accurate and up-to-date information. That’s where management information systems (MIS) come into play. MIS report provides the data and insights decision-makers need to make informed decisions.

• Makes communication easier: MIS systems make communication within and outside the organisation easier. Employees can easily access the information they need for day-to-day operations. 

• Tracking records: Keeping records in place is an essential function of management information systems. They provide an accurate record of all business transactions and act as a reference point for future transactions. This allows businesses to track their progress and performance over time, which is essential for making decisions.

Components of MIS

The following are the main elements of a management information system:

• Users: Individuals who use the management system.
• Info: Data about the business is stored in the system.
• Business Methodologies: Established practices for gathering, storing, and analysing data.
• Applications: Programs that handle the data are called software. These consist of applications like database software, spreadsheet programmes, etc.
• Hardware: Workstations, servers, networking hardware, and printers fall under this category.

Types of Information System

• Process Control: 

This system monitors a business’s physical or industrial processes, such as automobile assembly, petroleum processes, or metal fabrication. The process control system gathers data continuously and then provides a report on the system’s performance. 

• Management Reporting System

The management Reporting system is designed to help managers compare their company’s performance with the past year’s performance and with the expected performance. This helps managers to see if their company is doing well or not.

• Marketing and Sales

The Marketing and Sales system helps a business in the following ways:

• Understand about advertising, discounts and pricing
• Take appropriate quality management measures
• Monitor the advertising schedules and stores
• Generates reports that show which products are selling the most in different stores.

• Decision Support System

A decision support system gathers information from both internal and external sources. For example, a manager uses a decision support system to decide how much to spend on advertising and how products can be marketed effectively.

• Expert System

The AI-based expert system is built in such a way that it can take in, store, and use the knowledge of a human expert on a specific topic to help people with less expertise make decisions.

• Executive Information System

The executive information system provides information in tables and charts, making it easy for managers to analyse data and make business decisions.

• Transaction Process System

A transaction process system’s responsibility is to gather and handle the data generated by routine business operations such as reservations, deposits, payments, and orders.

• Local Databases

Local databases offer comprehensive data on the populations spread throughout a nation. These databases use data from public records, integrated local service offerings, open business listings, and social survey responses.

• School Information Management System

Updating and managing student attendance records has become easier with the school information system. The system completes this task and frees up teachers’ time for other beneficial pursuits.

• Human Resource

The HR system keeps track of funds for things like retirement, benefits, and payroll. It also allows communication between employees, HR, and management by offering legal compliance notices and mandatory training events.

How do MIS Reports work?

MIS report consists of analysis that helps leaders obtain better insights by integrating data. Basically, MIS reports are a snapshot of collected data that help understand what has happened in the past, what is happening now, and if any patterns are emerging. They are typically prepared once a month but could be done more often depending on the information being collected and analysed.

For instance, a product management team wants to launch a new product and needs collective information on what is trending and how their previous products are performing. An MIS report will help the team in this case. With everything in one place, it is easier for leaders to make the right decision.

MIS report provides a concise view of various important parameters, including key financial performance, HR indicators, order tracking, customer satisfaction, and churn rates. As a result, it can serve as a powerful tool for identifying opportunities and making decisions.

How to generate MIS Reports in Excel?

Creating MIS Reports demands excellence in MS Excel or other spreadsheet tools. The data is typically presented in a tabular format, and the user can manipulate the data to generate the desired reports. 

Here are the steps to create an MIS report:

1. Data compilation: To create an accurate and informative report, raw data must be collected from various departments. Once this data is compiled, it needs to be structured in a way that is readable and easy to follow. This includes deciding on row and column headings.

2. Segregation: Segregate the raw data and put them under respective headings. Apply filters to eliminate irrelevant data that won’t help you make decisions. This helps organisations focus on the data most relevant to your decision and make a more informed choice.

3. Template creation: The goal is to have a completed dashboard template. This can be done by using Excel formulas and pivot tables. A new sheet should be created in the report, and the data should be moved to the depository sheet. Formulas can then show the final results in the dashboard template.

Important point: While creating a MIS report, ensure that your headings are formatted correctly. For example, the column for revenue should be in currency form. Also, check your formulas multiple times to prevent any mistakes.

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Before you get to the profit side of the business and how to do the accounting of the balance sheet and the profit and loss statement, you need to know the types of expenses in the business and how to account for them. In every business, two major types of expenses are classified: direct and indirect expenses. All expenses will either come under direct expenses or indirect expenses. You need to know which expenses come under what head as it makes a difference in accounting and can also help in deductions and tax-saving purposes. 

It is important to ensure you track these expenses and enter them in the right head as it makes a difference. In this article, we will discuss all the different types of expenses a business may generally incur, how to segregate them, and the difference between direct expenses and indirect expenses. Read on to know more. 

What are Expenses? 

Whenever you start any business, you need to spend some money to get the business up and running. Once the business is up and running there will become recurring expenses that will have to be met on a daily basis, fortnightly, monthly or even yearly. While some expenses are recurring, there are some unexpected expenses that you haven’t accounted for or expenses that come up due to changes in business strategies and so on. 

The most basic types of expenses that every business will have to incur are: 

• Cost of raw material 
• Rent or land property to conduct the business 
• Electricity and water bills 
• Wages or salaries of employees 

Post that, some expenses may occur once in a while or sometimes, based on different situations. These are unforeseen expenses that you should account for. Some of them are: 

• Cost of damaged goods because of events such as rains, fire, robbery 
• Legal expenses in case of legal situations 
• Discounts and sales 
• Staff overhead expenses 

One needs to understand the expenses when they will be incurred and start accounting for them right from the start. They also need to have an emergency fund that can account for these unexpected expenses that may come up during the life of the business. These are the key points one needs to keep in mind in regards to the money that is going out of the business. 

What are Direct Expenses? 

Direct expenses are the core expenses of the business. Without these expenses, your business will not run. You need to account for these expenses no matter what the business situation is. These expenses are related to the raw material of the business or the purchase of the goods and services for the business. Direct expenses are expenses that go into producing goods or providing services. 

Direct expenses are needed in every company, be it a manufacturing business, an e-commerce business, a service-related business. They are to be incurred. But the expenses that may be a direct expense for you may not be the same direct expense for another business. 

For example, there are two companies, one that manufacturers soaps and shampoos and another that is a re-seller of the same products. For the manufacturer of the soaps and shampoos, the raw material is his direct expense. However, for the re-seller, the raw materials are not a direct expense but instead, the expenses related to the product’s sales are a direct expense. In short, the expenses that are related to the main strategy or the core of your business are the direct expenses for you. Every company may have different direct expenses they are exposed to, but every company has direct expenses that need to be accounted for. 

List of Direct Expenses 

As mentioned above, the list of direct expenses may not be the same for every type of business and may differ from business to business such as manufacturing, selling, production, e-commerce. However, we’ve listed down a few of the generic direct expenses that a business may have to incur. This is not an exhaustive list and you should look more in-depth at the direct expenses your business may be exposed to. 

Direct Expenses can be: 

• Factory, land or shop rent 
• Raw materials of the goods or the core cost of the business you’re in
• Direct labour and wages for your business 
• Manufacturing supplies such as factory or machines 

What are Indirect Expenses? 

The expenses that a business needs to encounter for operation purposes are indirect. Just like how a business cannot function without indirect expenses, the same way a business cannot function without indirect expenses. While direct expenses cover the costs of the core materials for the business, indirect expenses are the overheads that need to be incurred for additional services for the business. 

Indirect expenses may not be the same every month and will differ based on the revenue of the business and the nature of the business. While direct expenses are fixed, indirect is not fixed and may vary from time to time. Indirect expenses are not added to the cost of the final product or service but are accounted for separately, based on whenever they occur. 

Just as direct expenses are different for different natures of business, the same way, indirect expenses may be different for different businesses. For example, the indirect expense for a raw material company may be the wages and salaries of far off employees, but for a re-selling company, the wages and salaries may be direct expenses for them. 

List of Indirect Expenses: 

Indirect expenses are general business costs that need to be incurred to keep the business running. However, the general business cost may be different for all sorts of businesses. You need to identify what are the indirect expenses to the nature of your business. Also, not all indirect expenses will occur regularly and the same may vary or come up unexpectedly. All this needs to be accounted for while figuring the expenses of your business. 

Indirect Expenses can be: 

• Utilities 
• General office supplies such as stationery, desk, chairs etc. 
• Overhead expenses such as Electricity bill, water bill
• Pantry costs
• Re-sellers wages and salaries 
• Unexpected expenses due to situations 

Difference Between Direct and Indirect Expenses 

Knowing the difference between direct and indirect expenses can help you in accounting and ensuring your expenses are earmarked carefully. Without the complete knowledge of direct and indirect expenses, you may account for costs differently which would hamper the books of accounts. 

By a rule of thumb, the costs that are related to the core of your business should be accounted for direct expenses. These direct expenses would be different for all businesses but need to be incurred irrespectively. 

On the other hand, indirect expenses are costs related to operational running and need to be incurred for the smooth sailing of the business. Indirect expenses do not make a difference to the core of the business product or service but are mandatory for the overall business running services. 

This is the categorization of direct and indirect expenses and one needs to ensure they know how the expenses are divided according to the nature of their business. A business should also prepare in advance a list of direct expenses and indirect expenses. Ensure you know this before diving right into your business model. 

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Working capital management is a business tactic that effectively benefits the business in using the current assets. It helps them to maintain suitable cash flow and to meet short-term aims and other necessities. 

What is Working Capital?

Working capital also known as net-working capital is the difference between the current assets and the current liabilities of a company. 

• Current assets comprise cash, accounts receivables which are the unpaid bills by the customers, and inventories of raw materials and finished goods. 
• Whereas the company’ will include accounts payable, wages, taxes payable, and even the current portion of long-term debt. 

By checking the working capital of a company, we can identify how well the company is working and how they are managing the working capital to meet the day-to-day activities.

Working Capital = Current Assets – Current Liabilities

Types of Working Capital 

Based on the needs of the business working capital is divided into 8 different types.

• Permanent Working Capital
  • Regular Working Capital
  • Reserve Margin Working Capital
• Variable Working Capital
  • Seasonal Variable Working Capital
  • Special Variable Working Capital
• Gross Working Capital
• Net Working Capital

Permanent Working Capital

A part of the working capital that is permanently locked up in the current assets to run a business smoothly is called permanent working capital. Also called Fixed Working Capital, it is the minimum amount of current assets a company requires to operate the business in a given year. 

The minimum amount required to maintain the minimum stock of raw materials is an example of Fixed Working Capital. 

Depending on the size and projected business growth, the amount of permanent working capital is decided. 

Permanent Working Capital is further divided into Regular Working Capital and Reserve Margin Working Capital

Regular Working Capital

As the name suggests, Regular Working Capital is the amount of capital required to cover the regular operations of a business. Examples include daily wages, payments, etc. 

Reserve Margin Working Capital

Any kind of business will always need some amount of capital for unexpected situations other than the amount used to perform daily operations. Thus, the reserve margin working capital is set aside, which can be used during certain circumstances that can occur out of nowhere. Such incidents can be a strike, natural calamities, etc.

Variable Working Capital

Variable working capital is the fund that is invested in the business for a temporary period. This category of working capital is also identified as fluctuating working capital and can vary according to the size of the business or when there is a change in the assets of the business. Variable working capital is again subdivided into two other categories – seasonal variable working capital and special variable working capital. 

Seasonal Variable Working Capital

Every business requires additional working capital at one point in a year. For some businesses, it is during the availability of raw materials, for some, it’s during the festive season and so on. Some businesses that are into production and manufacturing do have seasonal demand for funds, and to reach that, the seasonal variable working capital is created. It is more suitable for businesses of seasonal nature. 

Special Variable Working Capital

Not all the events in a business are planned. Some might be a result of the present situation the business is undergoing. To meet such unexpected expenses like marketing campaigns, special events, etc., a certain amount is allotted and is called special variable working capital. 

Gross Working Capital

Gross working capital is the aggregate amount of funds invested in current assets. In other words, we can say that gross working capital is the total of the current assets of the business, which will include cash, accounts receivables, inventory, marketable securities, and even short-term investments. 

Gross Working Capital, if used alone, will not display the complete image of short-term financial reliability. Likewise, it does not showcase the operational proficiency of the business. To better understand the operational efficiency of a business, the current assets should be compared with the current liabilities. The result will show how efficiently a business uses its short-term assets to meet its day-to-day cash necessities.

Net Working Capital

Net working capital is the difference between the current assets and current liabilities of a business. The net working capital of a business showcases its operational efficiency, liquidity, and short-term financial capacity. A positive net working capital implies that the business is meeting its current liabilities. Hence this type of working capital helps in measuring the creditworthiness of the company. 

FAQs related to types of Working Capital

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Working capital management meaning

Working capital management means carrying out certain business activities to confirm that the business has enough resources to meet the expense of day-to-day operations by keeping the resources invested in the best productive way.

What is working capital management?

Working capital management is a business strategy performed to calculate money flow and thus plan for an efficient company or business functioning. This is done by using and observing the business’s current assets and liabilities in the best possible way. 

We can say that management of working capital is using a business tool to calculate the current assets of the business. This will enable businesses to effectively maintain appropriate cash flow. Further, it allows business to meet short-term goals and other requirements. If a company manages the working capital efficiently, it can use the trapped cash that will not be known otherwise. This will reduce the need for external borrowing, expand the business and invest in R&D.  

Importance of management of working capital

Working capital has many benefits for the business and some of them include, 

• Liquidity management
• Helps in decision making
• Helps in any situation of the cash crisis
• Prevents investment plans
• Helps in earning short-term profits
• Strengthens the work culture
• Improves creditworthiness of the business
• Creates a good reputation and a good working capital can also act as a guarantor to other enterprises

Components of working capital management

The most major components of working capital management are the current assets and current liabilities. The difference between the current asset and the current liabilities make up the working capital of a business. The current assets will include trade receivables, inventory, and cash and bank balances. 

Whereas, the current liabilities will include trade payables. All these should be managed efficiently for the smooth running of a business. Now let’s understand the components of working capital management in detail.

Trade Receivables

This is the amount that arises when a business makes a sale or when it provides service on credit. Trade receivable is also known by the name accounts receivables. This amount is shown in the balance sheet as current assets. 

Accounts receivables also consist of the amount due to the bills of exchange receivable. Every business must always ensure that its trade receivable cycle is in line with the industry. If the trade receivable period is extended, it will result in a delayed collection of cash which will impact the cash conversion cycle of the business. 

Accounts receivable is very important when it comes to evaluating a business. By checking the receivables turnover ratio, we can understand how well the working capital is being managed.

Inventory in working capital management

Inventory also comes under the current assets and it forms a vital component of the working capital management. It is important to efficiently manage the inventory of the business because it is responsible for the proper control over all the inventory right from the raw materials purchased and to the finished goods. 

To properly manage the inventory, you must start controlling the inventory, including timely purchase, accurate storage, and efficient use. This can maintain an even and orderly flow of finished goods to meet the commitments on time. 

Also, if the inventory is managed resourcefully, you can avoid excess working capital in holding the inventory that can cause a delay in the cash conversion cycle and can also increase the risk of obsolescence. An increase in the working capital will affect the business and its profitability.

Cash and Bank Balances

Cash is always considered as the king and it is an important component of current assets. Cash does not mean only liquid cash, but it can also include liquid securities which can be easily converted into cash. To keep the working capital cycle stable, it is essential to properly manage the cash of the business. It can also help the business in managing its operating cycle. By seeing the amount of free cash flow generated by the business, we can determine the efficiency of the business. 

If a business utilizes the cash appropriately, it can ensure the business saves trade discounts and can thereby improve the cash conversion cycle. This will also help in analyzing the working capital of any type of business of any nature.  

Accounts Payable or Trade Payables

Account payables come under the current liabilities which also play an essential component of the working capital management. Also, it includes the amount due to the bills of exchange payables. Certain amounts are what the business has to pay for credit purchases made by the business. 

A properly managed accounts payables will always ensure timely payment and create good business relations with creditors and vendors which is very important for the successful running of a business. Every business will have its included and they should always make sure that their trade payable cycle should be in line with the industry. 

Moreover, when a business has a short trade payable cycle, then more cash in hand should be maintained which will also result in longer trade cash conversion cycles and more cost on interest. When a business has a high trade payable turnover ratio, it proves that the creditors are being paid on time to enhance the business’s creditworthiness.

How to calculate working capital?

You can easily calculate the working capital of a business by subtracting the current liabilities from current assets. So the formula for calculating the working capital is as follows:

Working Capital = Current Assets – Current Liabilities

FAQs related to working capital management

1. Why is the current ratio considered significant?

You can find the current ratio by dividing the company’s current assets by current liabilities and it is also well-known as the working capital ratio. The current ratio shows the company’s financial stability as it determines the ability to meet short-term monetary obligations. The considerable current ratio of a business is 1.2 to 2.0. But when the current ratio is higher than 2.0, then it shows that the company is not managing its working capital proficiently. If the current ratio is less than 1.0, it specifies that the company’s liquid assets will not cover the company’s debts, which are due in the upcoming years.

2. Is the Collection Ratio Important? If yes, Why?

Yes, the collection ratio is important and it can identify how well a company manages its accounts receivables. The collection ratio is calculated by multiplying the number of days in an accounting period with the average amount of outstanding accounts receivables. Then the amount you get is divided by the total amount of net credit sales during the same accounting period. The collection ratio depicts the effectiveness of the company in collecting payment after the sales transaction is made on credit. If the company’s collection ratio is less, it shows that it has efficient cash flow.

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A trial balance is a statement of the balances of all the ledger accounts in a business at a particular time. It is used to check that the total of all the debit balances in the ledger equals the sum of all the credit balances in the ledger. If the trial balance does not balance, there is an error in the ledger accounts.

How do you prepare a Trial Balance?

The general ledger accounts’ closing balances are necessary to produce a trial balance. After recording each financial transaction in the journals and compiling it on the ledger statements, the trial balance is created.

The purpose of the trial balance is to confirm that the debits and credits in the chart of accounts are equal.

Here are a few things you should remember:

• Make sure every ledger account is balanced before beginning the trial balance. The balance is determined by the difference between the total of all debit entries and the total of all credit entries.
• Construct a worksheet with eight columns. Account name, account number, and the associated debit and credit amounts columns should all have column headings.
• Transfer the account name, account number, and account amount for each ledger account to the corresponding debit or credit column on the trial balance worksheet.
• The totals in the credit and debit columns should be added. In an error-free trial balance, the sums should be equal. You can close the trial balance after the totals are equal.
• Accountants must identify and correct any inaccuracies if there is a discrepancy.

Here are some examples of trial balance mistakes:

• Error in account balancing
• Entered the information in the incorrect column, using debit instead of credit or vice versa
• There are two entries of a transaction.
• Mistaken accounts have been used to make entries.
• Mistake in translation
• Absence of entries
• A misstep during the balances’ transfer to the trial balance
• The ledger has the incorrect amount recorded.

What are the methods of preparing Trial Balance?

The trial balance can be created using either of two techniques:

• Total Approach

Ledger accounts’ debit and credit sides are combined. The calculations in the credit and debit columns need to add up to the same amount. In the trial balance, the total of the debit side is put in the debit column, and the sum of the credit side is set in the credit column.

• Balanced Approach

According to the balanced approach, the trial balance only displays the balances of all the ledger accounts.

How are accounts listed in Trial Balance?

The trial balance accounts are listed in a particular order to ease the creation of financial statements.

A trial balance lists the accounts in the following order:

• Assets
• Assets
• Equity
• Revenue
• Expenses

The assets and liabilities must also be listed in order of liquidity, determined by how quickly a purchase may be turned into cash to settle liabilities. First listed are the assets that are the most liquid. Money, as well as current receivables, are included here.

How do you match a Trial Balance?

A trial balance serves to verify that each entry is correctly matched. If the trial balance totals do not match, there may be an accounting issue. 

An interim suspense account is set up to temporarily match the trial balance totals until the errors are found and fixed.

Adjusting entries are added to the trial balance after finding errors. The trial balance is therefore treated as an adjusted trial balance.

A periodic trial balance helps a business identify bookkeeping issues. Business owners don’t have to wait until the end of the year to create it and evaluate their financial data.

Read more articles related to Working Capital

Working Capital Management
Cost Of Capital
Gross Working Capital
Contra Entry

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