If you don’t know how to read and analyze a balance sheet, read this:

A balance sheet is a snapshot of a business at a specific point in time. It serves two purposes.

Internally, it provides information about the financial health of a company.

Externally, it depicts the business’s resources and how they are financed.

The equation to remember is: ASSETS = LIABILITIES + EQUITY

• ASSETS

Assets are what a company owns.

Current assets are assets that a company expects to convert to cash within a year.

They include:

• Cash

• Investments

• Receivables

• Inventories

•Prepaid expenses

They help in determining short-term debt-paying ability.

Non-current assets are long-term investments that are unlikely to be converted into cash in the near future, such as:

Non-current assets include:

• Investments in stocks and bonds

• Lands or buildings

• Long-term notes receivable

Property, plant, and equipment

They are assets with relatively long useful lives that a company is currently using in operating the business.

This category includes:

• Land,

• Buildings,

• Machinery and equipment

• Delivery equipment and furniture.

Depreciation is the practice of allocating the cost of assets over a number of years.

The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset’s life.

Intangible Assets

They are long-term assets that lack physical substance but are frequently very valuable.

Other intangible assets include:

• Goodwill

• Intellectual property

• Brands

• Trademarks

• LIABILITIES

Liabilities are what a company owes.

Current liabilities are obligations that the company must pay within the next year or cycle of operations.

They include:

• Accounts payable

• Wages payable

• Notes payable

• Interest payable

• Income taxes payable

The relationship between current assets and current liabilities helps evaluate the liquidity of a company.

When current assets are higher than current liabilities, the company is in a good position to pay its short-term creditors.

If not, the company can go bankrupt.

Long-term liabilities are obligations that a company expects to pay after one year.

Long-term liabilities include:

• Bonds payable

• Mortgages payable

• Long-term notes payable

• Lease liabilities

• Pension liabilities

• STOCKHOLDER’s (OWNERS’) EQUITY

This is the ownership claim on the company’s assets.

This section of the balance sheet consists of common stock and retained earnings.

If you add all the resources of a company and subtract its liabilities, what is left is the equity.

• HOW TO ANALYZE A BALANCE SHEET

We can analyze it using ratios.

Financial ratios are generally divided into four categories:

• Liquidity

• Solvency

• Efficiency

• Profitability

With the balance sheet, we will focus on the first three ratios

• Liquidity Ratios

Measure the short-term debt-paying ability of a company.

• Current Ratio =Current Assets / Current Liabilities

• Quick Ratio =Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities

• Cash Ratio =Cash & Cash Equivalents / Current Liabilities

A ratio between 1-3 is a good sign for a company, suggesting that a business has enough cash to be able to pay its debts.

A ratio of less than 1 means that the company can’t pay its debts. It may be necessary to finance or extend the time required to pay creditors.

• Solvency Ratios

Measure a company’s long-term paying ability.

• Debt-To-Equity Ratio = Total Debt / Total Equity

• Debt Ratio = Total Debt / Total Assets

The higher the ratio, the more debt and risk the company has.

• Efficiency Ratios

Measure the efficiency of converting assets into cash.

• Receivables Turnover Ratio =Sales / Accounts Receivable

• Inventory Turnover Ratio =COGS / Inventories

• Asset Turnover Ratio =Sales / Total Assets

Efficiency ratios can also be measured in days.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Assessment is an important process under the Goods and Services Tax (GST) Act in India. It refers to the verification and determination of the tax liability of a taxpayer.

Under GST, assessments are conducted by the GST authorities to ensure that taxpayers are complying with the provisions of the Act and paying the correct amount of tax.

The assessment process under GST is a self-assessment system, which means that taxpayers are required to file their returns/pay taxes on their own, without any intervention from GST authorities. However, to ensure compliance, GST authorities may conduct various types of assessments

Types of Assessments under GST

1. Self-Assessment (Sec 59)

Under this type of assessment, taxpayers are required to self-assess their tax liability and file their returns accordingly. The GST authorities will then verify the returns and may initiate further assessments if required.

2. Provisional Assessment (Sec 60)

This type of assessment is conducted when a taxpayer is unable to determine the correct tax liability due to various reasons such as incomplete information or pending investigation. The taxpayer is required to pay a provisional tax, and the final assessment is conducted after the relevant information is obtained.

3. Scrutiny of Returns (Sec 61)

This type of assessment is conducted when the GST authorities have reason to believe that a taxpayer has not paid the correct amount of tax or has not complied with the provisions of the Act. The authorities may ask for additional information or documents, and the taxpayer is required to provide the same.

4. Best Judgment Assessment (Sec 62 & 63)

This type of assessment is conducted when a taxpayer fails to file returns or provide required information. In such cases, GST authorities may determine the tax liability based on the best of their judgment & issue an assessment order.

5. Summary Assessment (Sec 64)

This type of assessment is conducted when the GST authorities have evidence of tax evasion or fraud. In such cases, the authorities may conduct a summary assessment and issue an assessment order.

Procedure for Assessments under GST

The procedure for assessments under GST is as follows:

1. The GST authorities will issue a notice to the taxpayer, stating the reason for the assessment.

2. The taxpayer is required to provide the necessary information and documents within the specified time period.

3. The GST authorities will examine the information and documents provided by the taxpayer and may conduct further investigations if required.

4. Based on the examination and investigation, the GST authorities will determine the tax liability and issue an assessment order.

5. If the taxpayer is dissatisfied with the assessment order, they may file an appeal before the Appellate Authority.

In conclusion, assessments under GST are an important process to ensure compliance with the provisions of the Act and the correct payment of taxes.

Taxpayers are required to file their returns and pay taxes on their own, and the GST authorities may conduct various types of assessments to ensure compliance.

It is essential for taxpayers to maintain accurate records and provide the necessary information and documents during assessments to avoid penalties and interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

1. Overview

The Ministry of Corporate Affairs (“MCA“), in its continuing drive to improve transparency and bolster integrity of financial reporting has amended the Companies (Accounts) Rules, 2014 (“Accounts Rules“) requiring companies to ensure that the accounting software used to maintain books of accounts has the following features and attributes:

• recording audit trails for each & every transaction;
• logging the edits made to the book of accounts along with the date when such an edit was made; and
• ensuring that the audit trail cannot be dis-abled.

The Companies (Audit and Auditor) Rules, 2014 (“Audit Rules“) have been correspondingly modified wherein auditors are now required to report, as part of the auditor’s report, as to whether, the accounting software used by the company being audited has the feature of recording audit trail (edit logs), the audit trail feature was operational throughout the financial year and had not been “tampered” with and such audit trails have been retained for the period as statutorily prescribed.

The MCA has notified that the aforesaid amendments will be effective from April 1, 2023, which implies that the accounting software employed by companies will need to be compliant with the Accounts Rules from FY 2023-24. The breathing space provided by the MCA ought to be leveraged by the companies to assess whether the accounting software has the requisite functional parameters and attributes which would be considered as being complaint with the Accounts Rules and where necessary, engage with their service providers and/or auditors to implement changes to ensure compliance.

Prima facie the amendments to the Accounts Rules and Audit Rules (collectively referred to as “Rules”) are relevant as an immutable audit trail would be critical to establish accountability and act as an impediment to falsification and manipulation of accounting records. However, the Rules are in certain respects ambiguous or lack specificity and this may lead to divergence in interpretation and application of the Rules by auditees and auditors. This article seeks to outline the aforesaid ambiguities as well as discuss steps which companies could undertake ensure effective compliance. It is our hope that the key stakeholders i.e. the companies, auditors and the MCA, do assess these ambiguities and arrive at a common ground before the Rules are implemented from FY 2023-24.

2. Audit Trails – To include or exclude?

The Rules don’t specify the fields or data sets for which audit trails are required to be maintained. In relation to a transaction, data would comprise of two types i.e. transactional data (for e.g. amount, accounting date, ledger accounts, narration, i.e. information which is reflected in the financial records) and data pertaining to the transaction (for e.g. identity of the user accounting the transaction or the time on which the transaction was posted). With reference to the latter, while it is obvious that the user identification (“User ID”) and transaction timestamp are necessary fields, it may be possible that other fields such as approval information (user ID of the approver and time stamp where transactions are approved) may be required to be logged as a part of the audit trial.

It can be argued that transactional data does not form part of the audit trail as the data is recorded in the books of accounts and replicating this information in the audit trail would not serve any purpose. However, since the Rules also mandate that “edit logs” are to be maintained, one could also argue that the audit trail should provide sufficient information to reconstruct or identify the original data prior to the edit being undertaken. For example, if a transaction is deleted or edited, apart from logging information about who effected the deletion/edit, the audit trail should include sufficient information to either view or trace the transaction which had been deleted.

3. Modification of Audit Trail

Audit Rules stipulate that the auditor should state as to whether, “the audit trail feature has not been tampered with and the audit trail has been preserved by the company“. In this regard, there is significant ambiguity on the remit of the word “tampered”. Is the requirement for the auditor to assess whether, the accounting software’s feature to create audit trails has not been tampered with per se (which would inter alia include unauthorized modifications to the settings of the audit trail) or whether tampering of the audit trail of transactions per se would also be covered (i.e. modification of the audit trail records)? Considering that modifications to the audit trail would defeat the purpose of maintaining audit trails, it would appear that the reference to tampering would be applicable to both the scenarios stated above.

4. Edits Logs & Audit Trails

The Rules mandate that “edit logs” are to be maintained. The word “edit”, when used in a grammatical context would mean a change to existing data and therefore it may be argued that edit logs would be required when an existing transaction has been modified. However, considering that the Account Rules refer to an “edit log of each change made in books of account“, it can be construed that edit logs would have to be maintained for all transactions. As such, a harmonious reading could be taken that the terms audit trail and edits logs are synonymous.

5. Audit Trails for non-financial records.

Certain records such as purchase orders or master data, which are not transactions per se, at least from an accounting standpoint, may be relevant from an investigation standpoint. For example, in the event fraudulent payments are effected through modification of bank account, audit trails relating to changes to bank account details would be of significant relevance. As such, it is not clear whether the term “transactions” refers solely to financial transactions per se or whether the term has to be broadly interpreted to include non-financial records or events, such as purchase orders or changes to vendor master data, which are correlated to financial transactions.

6. Internal Controls.

In order to demonstrate that the audit trail feature was functional, operated and was otherwise preserved, a company would have to design and implement specific internal controls (predominantly IT controls) which in turn, would be audited by the auditors. A company may leverage their existent internal control framework to design internal controls, in consultation with their auditors. An illustrative list of internal controls which may be required to be instituted are articulated below:

• Controls to ensure that the audit trail feature has not been disabled or deactivated.
• Controls to ensure that access to the accounting software is restricted to authorized users.
• Controls to ensure that User IDs are assigned to each individual and that User IDs are not shared
• Controls to ensure that changes to the configurations of the audit trail are authorized and logs of such changes are maintained.
• Controls to ensure that access to the audit trail (and backups) is disabled or restricted and access logs, whenever the audit trails have been accessed, are maintained. Controls to ensure that periodic backups of the audit trails are taken and archived

Conclusion.

Considering the patent and latent vagueness in the Rules, it would be advisable for Companies to keep an eye out for any guidance from the MCA and/or the Institute of Chartered Accountants of India in this regard. At the same time, while enabling audit trails may be a relatively simple task for companies which use ERPs such as Oracle or SAP, the same cannot be said for companies which use simplistic (or feature light) accounting softwares, which typically don’t have an audit trail functionality. Depending on the context, companies may have to effect significant changes to their existent softwares or implement a different software altogether. Since such changes take significant efforts and planning, it is imperative that companies start planning for this change as soon as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.