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.

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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