Section 145 METHOD OF ACCOUNTING
Section 145 METHOD OF ACCOUNTING
'Income u/h
PGBP' and 'income
u/h other sources' is computed by deducting the eligible expenses from the gross
revenue earned to arrive at the net income. Revenue
and expenses can be recognized in the books
of accounts on either accrual basis or
cash basis. Section 145 of the Income Tax
Act, 1961 allows
an assessee to adopt either
of these two
methods on a consistent
basis.
Cash System of Accounting
• Receipts and payments
are recorded in the year
in which the amounts are received/paid irrespective of the year
to which such payments/receipts relate.
•
Under cash system of accounting, valuation of opening stock
and closing stock
carries no relevance.
•
Depreciation is allowed as an expense
under cash system
of accounting in the manner
and to the extent prescribed u/s 32 of the Income
Tax Act, 1961.
Accrual
System of Accounting (Mercantile System)
•
Under accrual
system of accounting, receipts and payments
are recorded in the year in which they accrue
irrespective of
the fact when the same are received/paid.
·
Valuation of opening stock and closing
stock is an integral part of accounting under mercantile system of book-keeping. The treatment of undervaluation/overvaluation of opening stock
and closing stock has been provided in the table given
below :
Particulars
Opening
Stock
Closing
Stock
Treatment in case of
undervaluation
The undervalued amount is to be deducted from the
current year's
profits
The undervalued amount is to be added to the current year's profits
Treatment
in case of overvaluation
The overvalued amount is to be added to the current year's profits
The overvalued amount is to be deducted from the
current year's
profits
·
Certain expenses
listed u/s 43B are allowed
to be deducted only on actual payment
basis. Such expenses
are not allowed to be debited on accrual basis.
Particulars
Opening
Stock
Closing
Stock
Treatment in case of
undervaluation
The undervalued amount is to be deducted from the
current year's
profits
The undervalued amount is to be added to the current year's profits
Treatment
in case of overvaluation
The overvalued amount is to be added to the current year's profits
The overvalued amount is to be deducted from the
current year's
profits
Change in Method
·
A method
once adopted by the assessee
should be applied
by him consistently. However, in certain situations, the assessee can change the method of accounting if the change
has been approved by the Assessing Officer.
Different Methods for Different Business
·
If an assessee is carrying on more than one business, he can follow
cash system of accounting for one business
and mercantile system of accounting for another business.
• If an assessee has more than one source
of income u/h 'income
from other sources', he can follow cash
system of accounting for one source
and mercantile system
of accounting for other sources.
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#Section145METHODOFACCOUNTING
• If an assessee has more than one source of income u/h 'income from other sources', he can follow cash system of accounting for one source and mercantile system of accounting for other sources.
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