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Purchase Order-Purchase to Payment Cycle

February 13, 2020by Sanjeev Archak Sanjeev Archak No Comments

do i need purchase order and why nextprocess

A purchase order is a document sent from a purchaser to a vendor to confirm a specific purchase of goods or services. One little document can go a long way in clearing up the logistical confusion of a growing business. A purchase order is an important part of the purchase to payment cycle.

What is a purchase order?

A purchase order is raised by a buyer to a vendor. A purchase order denotes what exactly the buyer requires, terms of the delivery, quantities and prices of products or services. Often a purchase order is initiated by the purchase manager in an organization. Further, the purchase order or P.O. as it is called, goes through multiple levels of approval within the organization. Post approvals it is sent to the vendor. Needless to say, quotations have to be obtained from vendors before a P.O. can be raised.

Zoho Books allows the users to configure multi-level approvals for a purchase order with e-mails or in app notifications sent to all stakeholders.

Why use Purchase Orders?

1.They make life easier:

A purchase order is a document which puts down in writing the deliverables of a vendor. It is the best way to avoid miscommunication and time consuming back and forth with vendors. Further, all the internal stakeholders in the business are aware of what is purchased and can plan the business ahead.

2.Provides audit trail:

Purchase orders remove a lot of stress from the auditing process by providing auditors with a conclusive audit trail and an easy way to cross-check invoices and packing slips. Without purchase orders, prepare for a long, painful process of poring over invoices, receipts and emails with vendors.

3.Purchase Order is a legal document:

Once a vendor acknowledges a P.O. as accepted by him, it creates a mutually binding contract between the buyer and the seller. The seller is bound to deliver as per the terms agreed.

4.Tracking Orders becomes easy:

A purchase order makes it easy to track the goods and services coming into a business. It is essential for a business to track when shipments are arriving, how to pay for them etc., a concept like “Just in Time” will work only if production planning works in sync with purchase and receiving functions.

What should the Purchase Order Contain?

Here is list of items a P.O. must contain:

P.O. Number
P.O. Date
Vendor name and billing address
Buyer name and shipping address
Additional contact information
Delivery date
Shipping method
Shipping terms
Item name
Item description and technical information
Item quantity
Item unit cost
Line total
Taxes
Total price
Payment terms

What happens to a P.O. goods or services are delivered?

Upon the delivery of the goods, a goods received note (GRN) is generated detailing the items received. This GRN is compared with the P.O. to check if the ordered goods have been received. If the GRN is in agreement with the P.O. it is forwarded to the accounting department and the P.O. is “closed” The accounting folks do a three way match between:

Purchase Oder
Goods Received Note
Vendor Invoice

If all three are in agreement, then the vendor is paid. This completes the “purchase to payment cycle”.

When not to raise a Purchase order?

Certain regular, recurring purchases relating to the day-to-day operations of a business including rent, electricity, internet are usually billed for the month and do not require a purchase order.

We hope in this post we have able to address the basics of the Purchase to Payment cycle.

How to reduce debt?- An easy guide

February 12, 2020by Sanjeev Archak Sanjeev Archak No Comments

All businesses have to borrow at some stage to fund growth. Debt in your balance sheet is not an unusual item. However, it is not a comforting factor in your financial health. India has seen several large scale debt related defaults by large corporate’s. This begs the question-How to reduce debt? Debt Management is the answer.

Here’s a step-by-step plan to help you reduce your business debt, so you can reclaim your sanity and start focusing on other important tasks.

Start with a Budget

We can’t emphasize how important it is to have a budget. In fact, we have written a whole blog about this. A budget is the best way to set target for revenues and limits for costs. Measuring these targets with actual revenues and costs will give you a good idea where you stand as a business. A business owner will actually be able to determine how much he can borrow and how long it will take to repay the loans.

Make a repayment plan

EMI’s for debt repayment are known to very borrower right from the start. So for a business, it is all about having money to fund the repayment schedule. One of the key aspects of this plan is cash flow management. A business needs to have enough cash for EMI payments. There are two thumb rules a business can use to save cash:

Control spending: spend only on essentials. This is a tough plan which requires a lot of discipline.
Earmark cash for repayment: set aside a % of your sales or profits each month to pay EMI’s

Set an “Exit Date” for Debt

This is a part of the “Repayment Goals”. Marking out a date in your calendar to be debt free will keep your motivation levels up. The lenders too would have specified a repayment schedule and pre-closures are not penalized anymore by lenders.

Negotiate Terms with Vendors

It is simple, ask for more credit. Most successful retail companies let vendor manage their working capital for them by asking for discounts or more credits. This will help you streamline your cash flows as well.

Avail the right debt product

Identify the debt product which works best for your business. If working capital is what you are looking for then consider availing cash credits, overdraft or a working capital term loan. However, if you want to fund an asset purchase then avail a term loan. The security for the loan depends on the type of loan for e.g, for an asset purchase a mortgage on the asset will be security. However, an overdraft or a cash credit will be secured with stock or receivables of the business.The interest rates for these debt facilities vary as well. Choose an option that suits you best.

Renegotiate the terms of loans

What if you are not able to pay EMI’s? Don’t panic. You always have the option of renegotiating your loans. This requires the lender to recast the repayment schedule or include a moratorium period. Additionally, you can ask for a funding of interest via a funded interest term loan. This is easier said than done as it takes an excellent track record of the borrower to renegotiate.

Keep an eye on margins

Interest payments have a huge impact on margins. It is important to minimize the hit of interest on margins. As a business change your product or service mix to reduce low margin offerings.

Explore leasing

Leasing equipment’s often works out cheaper than owning them. Leasing will help reduce huge upfront payments for equipment’s.

Final Thoughts

It’s perfectly normal to be worried about repaying loans. The best way of getting rid of this stress is to pick debt management/reduction ideas, commit to a plan and make it happen.

Penalties for Fake Invoices

February 11, 2020by Sanjeev Archak Sanjeev Archak 1 Comment

Ever since the introduction of GST, input credit has become a focus point for most tax payers. GST was supposed to have automated the process claiming credit. However, this facility has not seen light of the day. Further, confounding the problems is the recent ruling imposing input credit restrictions. In October last year GST department mandated that a tax payer will be able to claim only 10% of input credit if the vendor has not filed his returns. The Government was forced to bring in this rule as only a handful tax payers were filing GST 1 returns. Another major problem the Government is battling is that of fake GST invoices. In order to combat this problem the Government has announced penalties for using fake invoices. This penalty will be applied to both persons accepting & making the fake invoices.

Recent Budget Amendments

The Budget presented by the Finance Minister earlier this month has introduced a new Section called Section 271AAD in the Income Tax Act. This Section provides for penalty for:

A false entry in the books of accounts
Omitting entries in the books of accounts which are required to compute total income with an intention to evade tax

It is important to note that these penalties will be applicable from 01.04.2020. The Assessing Officer (the Income tax officer examining books & returns) is empowered to direct the tax payer to pay this penalty if he finds there are fake entries or omissions in the books of accounts.

What is the quantum of penalty?

The penalty shall be equal to the aggregate amount of such false entry or omitted entry.

What is a false entry?

False entry has been defined to include the use or intention to use:

A false or forged document such as a false invoice or in general a false piece of documentary evidence
An invoice for supply of goods or services where the actual goods or service has not been delivered
Invoice from or to a person who does not exist

The definition is wide ranging one which includes even the “intention to use” and further it goes to include not just invoices but all other documentary evidence. This could include balance confirmations from vendors/customers or any other correspondence with business associates.

Who shall be liable to pay penalty?

The penalty shall be levied not only on the person using the false entry but also on the person providing such false entry.

This amendment has far reaching consequences. The Government has now synced both Income Tax and GST data bases so that there real time information sharing. If a tax payer gets found out for a false entry in an Income Tax proceeding, it is safe to assume that, he will be sent a notice under the GST law as well.

Suitable changes have been made to Section 122 & Section 132 of the IGST Act, which deal with penalties for improper invoicing and frauds. Apart from monetary fines, GST registration can also be cancelled by the authorities.

So every business owner needs to be vigilant and not indulge in unethical or fraudulent business practices. It is evident that penalties for fake invoices will be steep.

Year End Payroll Compliance’s

January 24, 2020by Sanjeev Archak Sanjeev Archak No Comments

As we welcome the New Year 2020, we must get ready to say good bye to the Financial Year 19-20. Every organization must prepare itself to handle a basket of employee related statutory compliance’s. Let’s explore the year end payroll compliance’s.

The Government has entrusted the employers with handling duties which are critical to employee’s finances. Accordingly, every employer has to:

Deduct taxes from employers
Contribute towards statutory components viz, ESI,PF,Bonus,Gratuity
Remit taxes & other dues to the Government
File returns with various Government departments

Deduction of Taxes

The Income Tax Act, 1961 mandates that it is the employer’s responsibility to deduct the correct amount of taxes from the salary of an employee. In order to arrive at the tax amount the employer must collect proofs of investments from the employees. It is these proofs which ultimately result in a Form 16, which is used by employees to file their tax returns. Here is what an employer must do:

Communicate to the employees about the need for investment proof
Clearly list out the documents which is called as “Proof”
If possible, hold multiple rounds of proof collection
Re-calculate the TDS based on proof submitted
Deduct the TDS from employees salary
Remit the TDS to the Government within due dates

In addition to the above, every employer must file E-TDS returns for the January-March quarter within the due dates. The credit of tax deducted from the salary is transmitted to an employee only when the E-TDS returns are filed. The TDS deducted by the employer appears in the Form 26AS of every employee from whom tax has been deducted.

Further, it is important to note that a Form 16/Form 12BA can be generated only when the employer files his E-TDS returns. The Government requires that the Form 16’s be provided to employees within certain due dates. The Form 16, so issued by the employer, contains all the information required by an employee to file his income tax returns.

What happens when there is salary from more than one employer?

Section 192(2) of the Income Tax Act deals with situations where an individual changes employers during the year. The Law requires that the employee provide to the present employer details of salary income received from the former employer and TDS done thereon. The present employer will be required to deduct taxes on aggregate amount of salary (including salary from the previous employer)

If the employee fails to provide these details, it will be likely that he will have to pay interest on the taxes owed at the time of filing the return.

Contribution to Provident Fund & Employee State Insurance

The Provident Fund rules require the employer to deduct 12% from the salary of every employee as “Employee’s Contribution to Provident Fund”. The employer contributes 12% from his side as “Employer’s Contribution to Provident Fund”.

The employee’s contribution to provident fund is allowed as deduction from income tax under Section 80C. It is imperative that the employer includes the PF contributions in the Form 16 of the employee.

In order to ensure PF gets computed correctly and remitted on time, the entire payroll process has to be automated. We recommend Zoho Payroll for effortless payroll processing.

Employee State Insurance scheme stipulates that employer & employee contribute 4.75% and 1.75% of salary to the Insurance scheme. This scheme is applicable to employees who have a salary of less than Rs 21,000. Further, employees are not eligible for an income tax deduction for contribution to this scheme.

Remit taxes & Filing returns with the Government

Every employer has the onerous responsibility of depositing the amounts deducted from the employees with the Government. These returns have to be filed within specified timelines:

Sl.No	Particulars	Due Date
1	TDS	Deposit of TDS by 7th of every month
2	Provident Fund	Deposit of PF by 15th of every month
3	Employee State Insurance	Deposit of ESI by 15th of every month
4	ETDS	Filing of ETDS by 31st of every quarter

Non deposit of statutory deduction will lead to penalties and even criminal prosecutions. It can have a worse impact on the business’s reputation, because compliance violations tend to cause customers to lose faith in the business.

Needless to say that being compliant with regulations is a best bet for any business. As more employees get added to the business, more automated compliance management must get. Here is where Integra Books can help. We have a unique solution where expert human resources use the best technology to manage your business. Get in touch today.

PS: As a related piece we recommend that you read our previous blog on payroll here

Understanding Debits and Credits

January 22, 2020by Sanjeev Archak Sanjeev Archak No Comments

Every industry runs on jargon. These jargon often trip people. In the accounting world the tripwires are “Debit” and “Credit”. There is no doubt that Debit and Credit are the cornerstones of the accounting block. Understanding debits and credits will help a business owner read financial statements better than before.

What are Debits and Credits?

In a nutshell, debit represents all the money flowing into business and credit represents all the money flowing out of business. Most businesses these days use double-entry system of accounting. Under this system, every transaction has two legs i.e, a debit and a credit leg.The entire business is organised into individual accounts. For ease of understanding lets call these accounts as buckets

For example:

the cash in your bank account will be the “Cash” bucket
the value of your furniture will be the “Furniture” bucket
the bank loan taken by your business will be the “Loan” bucket

Whenever your business purchases furniture or repays or avails a loan the balances in these buckets changes. Recording the changes in these buckets requires a language other than English. That is where debits and credits come in. Often, accountants abbreviate debits and credits to dr and cr.

How do debits and credits operate?

In a business money doesn’t appear or disappear out of nowhere. Debits and credits are designed to track where money is coming from and where to it goes.

Let’s take an example where you decide to buy a piece of furniture for Rs 50,000, here is how it will look like in our bucket system:

Firstly, money will move out of the cash bucket, cash bucket stands credited for Rs 50,000
Secondly, the furniture bucket will increase by Rs 50,000

As mentioned earlier, in the double entry system every debit has a corresponding credit. Here is how the entry will look like:

Account	Debit	Credit
Furniture	50,000
Cash		50,000

An accountant would say that we are crediting the bank account for Rs 50,000 and debiting furniture for Rs 50,000.

How do debits and credits operate in liability accounts?

The cash and furniture buckets are “asset” buckets. There are “liability” buckets as well. Examples of liability bucket are business loans, share capital. Yes, your own share capital is a liability for the business. We will get to that later in this post. Let’s see how debit credit and operate when you borrow a loan of Rs 50,000:

Firstly, money will move into the cash bucket, cash bucket stands debited for Rs 50,000
Secondly, money will move into the loan bucket, loan bucket stands credited for Rs 50,000

This transaction has increased the cash and loan balances. Cash balance denotes what you have and the loan balance denotes what you owe. Here is how the entry will look like:

Account	Debit	Credit
Cash	50,000
Loan		50,000

How do debits and credits operate in equity accounts?

Let’s take a situation where you invest Rs 50,000 as equity share capital in the business, debit and credit will operate as under:

Firstly, money will move into the cash bucket, cash bucket stands debited for Rs 50,000
Secondly, money will move into the equity bucket, equity bucket stands credited for Rs 50,000

Why is it that crediting an equity account makes it go up, rather than down? That’s because equity accounts don’t measure how much your business has. Rather, they measure all of the claims that investors have against your business. Here is how the entry will look like:

Account	Debit	Credit
Cash	50,000
Equity		50,000

The Debit and Credit Thumb Rule

Here is a simple way to remember debits and credits in accounting:

Debit	Credit
Increases an asset account	Decreases an asset account
Increases an expense account	Decreases an expense account
Decreases a liability account	Increases a liability account
Decreases an equity account	Increases an equity account
Decreases revenue	Increases revenue
Always recorded on the left	Always recorded on the right

If you’d rather not deal with debits and credits at all, try Integra. We’ll do your double-entry bookkeeping for you, all online, no matter where you are in world.

A Slackers Guide to Bookkeeping-The Lewbowski Way

October 25, 2019by Sanjeev Archak Sanjeev Archak No Comments

Doing your books isn’t exactly a fun activity. You could be a slacker or a hardworking person, but there are definitely other entertaining things for you to do. So, we have come up with a slackers guide to bookkeeping.

Use technology to make it easier

Keeping track of receipts/bills is hard. You are likely to lose most of them. So use some simple tools which will make your life easy. Try using:

Cam Scanner: A great way to digitize your receipts. Take a snap and store them forever. Also, don’t forget to send it to your accountant.

Zoho Expense: Lets you create expenses, store receipts. This also has an optical scanner for scanning receipts that you upload. You can skip entering details manually.

De-clutter your business

Technology to the rescue again! Choose a software like Zoho Books to do the heavy lifting. Use automated workflows to send invoice reminders, get notified when a customer pays. Connect your bank accounts to auto-match receipts & payments with invoices. These will save a lot of time.

Separate your Business & Personal Expenses

Ancient wisdom says don’t mix business with pleasure. Therefore separate your business & personal expenses. For starters open a business bank account. Have all your business expenses & revenues in this account. You can always draw money from this account as salary or reimbursement.

Make it a Habit

In between all the fun you are having, take some time out to do bookkeeping. Bring all your smartness to fore at least once a week. Check for vital signs like cash flow, unpaid invoices & vendor bills, payroll and taxes.

“This is a very complicated case, Maude. You know, a lotta ins, a lotta outs, lotta what-have-yous.” — The Dude

Be the Dude and let Integra Books to do the heavy lifting. We will pair you with an expert and a software.

(PS: If you are a hard-working, diligent person, we are sorry we wasted your time. Here is something for you too)

E Commerce Accounting 1.0- A must read

October 24, 2019by Sanjeev Archak Sanjeev Archak 1 Comment

SME Website Increasing Potential of Indonesia

The internet is fueling the world economy. India is no exception. An enormous population, increasing smart phone penetration and cheap data rates make India a prime market for any e-commerce business. A report by Business Today states that Indian e-commerce business has reached $38.5 billion. But before you start up you need to figure out a business model,buy a software platform, have a logistics partner, have a sales & marketing plan. However, do not forget to have an accounting plan in place. A online venture is a challenge to an accountant and the founder. E-Commerce Accounting 1.0 is the prep lesson before you hit the ground running.

Choose an E-Commerce Platform

It all starts from having a tool for handling your entire online business. A e-commerce platform will enable you to:

build your website
catalog your products
handle orders/invoicing
connect with payment gateways
manage your inventory

Some of the popular tools are Shopify, Magneto & Zoho Commerce. These tools will help you set up an online store quickly with least effort.These tools have to integrate with books of accounts for recording sales, purchase transactions. We recommend Zoho Commerce for the automatic integration with Zoho Books. This integration will save critical man hours.

Payment Gateways

A majority of your customers will pay you online. Your customers will make payments for purchases via a payment gateway. Your bank accounts will have to be integrated with payment gateways. There are multiple payment gateways to choose from like Razor Pay, PayU & PayPal. These gateways charge anywhere between 1.5% to 5% of the payment received as gateway charges. Further, they do not transfer amounts received instantly to the bank account. There is lag of 2-3 days before amounts are credited.

Moreover, a reconciliation has to be done between the invoices raised and cash received from the payment gateway. Your books of accounts must automate, partly if not fully, this process.

Manage Inventory

If you hold inventory, then opt for an inventory management tool. Always remember that unsold inventory blocks cash. Therefore, an inventory tool will give you an insight into fast,slow and non moving items. It makes sense to sell only fast moving items and stock slow moving only when there is a demand.For instance, offering discounts on slow moving items can unblock cash. Zoho Inventory allows you manage the entire process from procurement to sale seamlessly. Re-order level can be set for all items of inventory. This will prevent you from selling items that you don’t have.

Handling Product Returns, Credits & Discounts

E-commerce business thrives on discounts, cash backs & other credits. All of these have a financial impact. Seamless integration between the e-commerce store and accounts will help. As the number of transactions rise, discounts and returns are bound to increase. An accountant must be fed this information for tracking numbers. Financial insights from books of accounts can be used to calibrate business strategies. You can read our post on retail metrics here

Managing Logistics

This is the “last mile” for an online business. The most critical part of the business is on time delivery. Delivery deadlines have to be met and measured as a KPI. Indians still prefer Cash on Delivery, which means the delivery partners have to collect cash as well. Secondly, the cash has to be deposited into your bank account. Typically, there is a 2 week gap between collection & deposit of cash. In other words, your logistics partner becomes your debtor as well.

An accounting software must support integrations with logistics partners. This is a must as cash is involved.

Comply with GST Rules

In addition to the above, you must abide by GST regulations. GST in India is complicated. Different rates of taxes apply to:

sales between the states
sales within the state
export sales
warranties
additional services tied to product sales

Therefore, all the tools of your business must combine to meet this regulation. For example Shopify or Zoho Commerce must apply GST rates based on the customer location. Further, inventory tool must apply GST on warehouse transfers. Similarly,materials sent out for job work must also be addressed. As transactions increase GST filing must get automated as well.

Final Thoughts

This post is the result of handling clients in the e-commerce space. Integra Books uses and implements all the Zoho products mentioned in this post. The benefits of technology and automation can transform your business. Let Integra Books assist your online business. Get in touch!

Messed Up Accounting: Books Breaking Bad

October 22, 2019by Sanjeev Archak Sanjeev Archak 2 Comments

We have given you a guide on effective accounting and setting up financial systems. What if these guides are not followed? The result will be messed up accounting and a bad set of books. Here is a primer on how to identify mistakes in your books of accounts.

Accounts not Reconciled

Bank accounts, credit card statements, inventory, debtors and creditor accounts have to be reconciled. If the accounts aren’t reconciled, it’s very likely that there are erroneous transactions or missing transactions. It is very important to reconcile the TDS & GST accounts. Left undone, these could lead to tax issues for the business.

High Accounts Receivable & Payable

Accounts receivables & payables are dynamic numbers. Old invoices need to be paid and the new ones marked as to be paid. If these two are static then your accountant is not marking money received or paid against invoices. This can lead to double counting of revenue & expenses. A customers & vendor balances report will throw up this anomaly.

Negative Inventory Balance

This means that you have sold products that you do not have. This can have an impact on your profits as well. If the negative balances add up over time, it takes huge efforts to bring it back to the current position.

Incorrect Capitalization

Another recurring problem we see is that accounts which need to be capitalized are not done and instead expense accounts end being capitalized. Missing out on capitalization will lead to lower depreciation claim and thereby higher taxes.

Payroll not booked correctly

Payroll is a significant cost for your business. This is an expense and a liability as well. Wages have to be paid to employees and payroll taxes to the Government. A simple thumb rule is there must 12 entries in the payroll expense accounts and payroll taxes account must not have any balance. Variations from these norms mean that there is an error.

Inconsistent method of accounting

You must adopt either cash or accrual method of accounting. This often depends on the nature of the business. Once chosen, follow the method consistently. If you have switched between methods or have used a hybrid of these two will mess up the books.

Negative Balances in Accounts

Accounting is much more than arithmetic. Accounting rules do not permit negative balances in any account. If you spot negative balances then it is another case of bad bookkeeping.

Incorrect Capital Accounts

Funding rounds raised by your company needs to show in the capital. The cap table is also derived from this account. Different categories of capital need to be shown separately. Further funding rounds could become complicated if all types of capital are lumped together.

So hire Integra Books to make your life easy. Integra Books is a modern and effective way of managing your business finances. We use a combination of technology and human expertise to make sure you get the best financial services for your business.

GST Changes: Input Credit Restriction

October 21, 2019by Sanjeev Archak Sanjeev Archak No Comments

Another set of changes to GST law has been announced on 20.10.2019. This time the GST Council has decided to restrict the input credit available to tax payers. Consequently, input credit in respect of invoices/ debit notes not uploaded by suppliers (i.e. not appearing in form GSTR-2A) cannot be availed in excess of 20% of the eligible ITC pertaining to invoices / debit notes uploaded by the suppliers. This input credit restriction is explained as an illustration below:

Particulars	Actual ITC	Eligible ITC after amendment
Input credit for Oct	1000
Input credit appearing in GST 2A	600	Rs 600 is available as credit
Input credit not appearing in GST 2A	400	Rs 120 (600*20%) or Rs 400 whichever is lower i.e, Rs 120 is available as credit
Total GST Input Credit		Rs 720

This amendment will create multiple problems for tax payers and tax professionals.Starting October 2019, all tax payers will have to reconcile the input credit as per books of accounts and GST 2A. Further, the differences between the two will have to be communicated to the vendors. This is essential to avail input credits.

How will this impact quarterly return filers?

As per the GST law, tax payers with an annual turnover of less than 1.5 crores have the option of filing GST 1 returns quarterly. If you are business filing monthly GST returns and your supplier is filing quarterly returns, then there is bound to be a input credit mismatch. This will lead to a situation where large businesses will stop buying from small vendors.

How will the GST portal identify ineligible credits?

All manner of GST credits are reflected in the GST 2A. The GST portal does not have any facility to distinguish between credits which can and cannot be availed. This being the case using GST 2A as measure to avail input credit is not a good idea.

Is a return matching tool available to tax payers?

The new return structure is supposed to include a matching tool. However, the launch of this tool has been put off till April 2020. The absence of this tool means that tax payers will have to invest in resources and systems to do the reconciliation. Further, there is a time constraint as GST returns have to filed on the 11th and 20th of the month. Setting aside weekly off days and one day for tax payment, the tax payers have a small time window to match GST credits, reverse ineligible credits, re-avail reversed credits and compute tax payable.

How will this impact compliance costs?

The GST has already increased compliance costs due to complicated returns schema and multitude of returns. GST law has been amended countless times since inception. Huge number of clarifications/notifications/ circulars have been released making matters even more complex. Further, this amendment also burdens tax professionals with more work prior to filing returns. This is bound to push up compliance costs.

Final Thoughts

The Government has not thought through this idea before implementation. There are basic errors in this idea which have not been addressed. Moreover, this idea does not address month end movement of goods i.e goods/services provided at the month end with invoices being raised,such goods/services received in the next month. There is bound to be input credit difference in this case as well.

A business owner will now have to chase all his vendors for input credits. Are business owners supposed to run business or worry about paper work? Chasing vendors will take up a huge resources and effort. Entrepreneurs are supposed to create jobs and fuel the economy. They are not be burdened with compliance clutter. These amendments to the GST are law are wholly unnecessary.

SaaS: How to Recognize Revenue

October 21, 2019by Sanjeev Archak Sanjeev Archak 2 Comments

The SaaS business model provides some interesting challenges to both businesses and accountants.The SaaS industry has several metrics to measure growth. There are terms like Monthly Recurring Revenue, Average Revenue Per User, Annual Contract Value, all these have revenue in common.But these may not have any accounting relevance.How to recognize revenue for a Saas company?

Lets us understand some of these terms:

Annual Contract Value(ACV)

ACV is the total value of the contract agreed with the customer. This contract can be for a year or more. This also called a “booking”. Some SaaS companies include one time implementation or customization fees into “booking”.

Annual Recurring Revenue(ARR)

ARR is the Annual Recurring Revenue from your customers. This the revenue you’d collect in the coming 12 months if you don’t add or churn anything.

Monthly Recurring Revenue (MRR)

This is the ARR divided by 12 or you could say ARR is MRR times 12.

These terms do not have any relevance under GAAP or India Accounting Standards. How does an accountant view these terms?

Here is an example with multiple contracts being signed and going live on different dates:

	1st Contract	2nd Contract	3rd Contract	4th Contract	5th Contract
Contract Signed	1-Apr-19	1-May-19	1-May-19	1-Jun-19	30-Jun-19
Go Live Date	1-May-19	1-Jun-19	1-Jul-19	1-June-19	01-Jul-19
Term	12 months	12 months	12 months	12 months	12 months
ACV	1,20,000	1,20,000	1,20,000	1,20,000	1,20,000

Among the above contracts, only of them will recognized for as ARR viz, Contract 4. The revenue on the other contracts will be recognized as seen below:

	April	May	June	July
ACV Bookings	1,20,000	2,40,000	1,20,000	–
ARR Booking	1,20,000	2,40,000	1,20,000	–
MRR Booking	10,000	20,000	20,000	–
Recognized ARR	–	1,20,000	3,60,000	6,00,000
Recognized MRR	–	10,000	30,000	50,000

As the CEO of an Enterprise SaaS company, make sure you understand if you are talking bookings or recognized revenue. Your bookkeeper should be able to help you out if you have questions.

A good accountant will recognize revenue when it is due and will help the revenue curve for the company. Revenue numbers have a huge influence on founders and investors. Therefore, make sure your ARR and MRR numbers are correct.