Clause wise discussion on form 3CD Clause 11 (a) to (d)
(a) Method of accounting employed in the previous year.
(b) Whether there has been any change in the method of accounting employed vis-a-vis the method employed in the immediately preceding previous year.
(c) If answer to (b) above is in the affirmative, give details of such change, and the effect thereof on the profit or loss.
(d) Details of deviation, if any, in the method of accounting employed in the previous year from accounting standards prescribed under section 145 and the effect thereof on the profit or loss.
[Clause 11 (a) to (d)]
Clause 11 (a) (b) and (c) is applicable for all assessee but clause 11(d) applies to only those assessee who follows the merchantile (accrual) system of accounting since AS (IT) II is applicable only to these assessees.
Last edited by gopalji; 17-08-2010 at 04:09 PM.
Can assessee follow the hybrid system of accounting
The Finance Act, 1995 has amended section 145 with effect from assessment year 1997-98 to provide that the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” must be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
It has also been provided that the Central Government may notify in the Official Gazette from time to time the accounting standards to be followed by any class of assessees or in respect of any class of income.
The hybrid system of accounting viz. mixture of cash and mercantile therto allowed to be followed by the assessee is not permitted from assessment year 1997-98.
However, the assessee may adopt cash system of accounting for one business and mercantile system of accounting for other business. Once the choice of method of accounting is decided, the assessee must follow consistently the method of accounting employed.
If he employs different methods for different businesses regularly and consistently, the profits would have to be computed in accordance with the respective methods, provided the result is a proper determination of profits.
As regards the accrual system of accounting the Institute has published a “Guidance Note on Accrual Basis of Accounting” which may be referred to.
As per the Companies (Amendment) Act, 1988 every company is required to keep books of account on accrual basis
It may be noted that in view of amendment made by the Companies (Amendment) Act, 1988 in section 209 of the Companies Act, every company is required to keep books of account on accrual basis.
In other words, a company governed by the Companies Act, 1956 cannot follow cash system of accounting unless exempted under the Companies Act, 1956.
The provisions of section 209 (3) of the Companies Act, 1956 are, however, not applicable to entities other than companies.
Under sub-clause (b), whether there has been any change in the method of accounting employed vis-à-vis the method employed in the immediately preceding previous year is to be stated. As already noted, an assessee can follow either cash or mercantile system of accounting.
If there is any change, the effect thereof has to be stated under this clause.
In so far as the question of effect of such change on the profit or loss is concerned, the concept of materiality is the basic governing factor.
If it is not possible to quantify the effect of the change in the method of accounting, appropriate disclosure should be made under this clause.
Can assessee follow number of accounting policies for purpose of maintaining his books of account
An assessee can follow a number of accounting policies for the purpose of maintaining his books of account.
As per AS-1 all significant accounting policies adopted in the preparation and presentation of financial statements shall be disclosed.
The disclosure of the significant accounting policies shall form part of the financial statements and the significant accounting policies shall normally be disclosed in one place. Any change in an accounting policy which has a material effect in the previous year or in the years subsequent to the previous year shall be disclosed.
The impact of, and the adjustments resulting from such change, if material, shall be shown in the financial statement of the period in which such change is made to reflect the effect of such change.
As per paragraph 9 under AS(IT) relating to disclosure of prior period and extraordinary items and changes in accounting policies, a change in an accounting policy can be made only if:
a) adoption of different policy is required by the statute; or
b) the change would result in a more appropriate presentation of the financial statements.
Do a change in an accounting policy amount to a change in the method of accounting
A change in an accounting policy will not amount to a change in the method of accounting
and hence such change in the accounting policy need not be mentioned under sub-clause (b).
This is due to the fact that as per the requirements of AS-1 and AS(IT)-1 such changes and the impact of such changes will be disclosed in the financial statements.
It may be noted that a change in the method of valuation of stock will amount only to a change in an accounting policy and hence such a change need not be mentioned under sub-clause 11(b) but should be mentioned in the financial statements.
reasonable checks should be followed by the tax auditor
The tax auditor should apply reasonable checks to the earlier year’s accounts to ascertain whether there is any change in the method of accounting as compared to that of the year under audit, after obtaining a written confirmation from the assessee as to the method of accounting followed.
It must also be ascertained as to whether the AS(IT) as may be applicable to the assessee or to the class of income, have been followed
It must also be ascertained as to whether the AS(IT) as may be applicable to the assessee or to the class of income, have been followed.
Presently, only two AS(IT) have been prescribed. - AS(IT)-I relating to disclosure of accounting policies and AS(IT)-II relating to disclosure of prior period and extraordinary items and changes in profit and loss account.
The tax auditor has to report the details of the deviations in the method of accounting in the previous year from the AS(IT) and the effect thereon on the profit or loss.
The tax auditor, while reporting on prior period and extraordinary items should report only such items which fall within the meaning of prior period items and extraordinary items in the relevant AS(IT).
Attention is invited to AS(IT)- II, paragraph 10, according to which any change in an accounting policy which has a material effect is required to be disclosed.
As stated above, a change in the method of valuation of closing stock would amount to a change in an accounting policy and has to be stated in the financial statements.
The tax auditor should ensure that in case the same is not stated in the financial statements, the fact should suitably be stated under clause 11(d).
He may rely on the various pronouncements and clarifications made by the ICAI.
Whether LLP permitted to follow cash method of accounting
As per Section 34(1) of the LLP Act, 2008, it may follow either the accrual basis or the cash basis of accounting. The detailed section may be seen at knowledgebible.com under resources category.
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