The 1-hour guide on How to prepare Financial Statements

Did I say prepare your financial statements in just 1 hour?

Oh! So sorry,

Actually, Rajesh, one of our clients, prepared his financial statements in less than 30 minutes.

Isn’t that exciting?

He was extremely happy to achieve Accounting Independence!

And here were his Financial Statements, his Trading & Profit & Loss a/c, and his Balance Sheet.

Mind you, the entire financial statement was prepared by Rajesh, even without having an accounting background.

The idea is to promote voluntary compliance to avoid the notice and scrutiny process for taxpayers like Rajesh.

Case Study

The client

So, there was this Salaried employee client, Rajesh, a Software engineer, also a trader in Stock Futures Derivative, who was ignorant about reporting his financial figures in the Income Tax Return, potentially could risk some scrutiny, which would take away his peace of mind and give him sleepless nights, realized that it is not very complex, rather simple but important to learn the art of preparing financial statements to gain Accounting Independence.

The Problem

One fine day, Rajesh just received an e-campaign message from the Income Tax department, only to verify the information relating to his financial information reported in his Income Tax Return against the data in the Annual Information Statement and pre-filled Income Tax Return.

There were a few figures missing and some were not tallying with last year’s balances including figures of Stock Futures Derivative as shown in his return filed, which finally triggered his awareness of the importance of knowledge to prepare financial statements, to be able to present a true and fair view of his financials in his returns, and avoid any mismatch.

He initially would randomly pick up financial figures such as Derivative Income from Broker/exchange ledgers and closing balances of Bank Balances, Investments, Assets, and Loans and post them in his Balance Sheet statement in Income Tax Returns without any formal preparation of tallied financial statements.

Rajesh never prepared any financial statements, as he was not aware of the statutory requirement to do so.

Where to learn, what to learn, and how much of it is good enough for him was his biggest question? A lot of confusion everywhere.

So, he then decided to learn and prepare his financial statements for better clarity and get a complete financial overview and also avoid the potential risk of receiving scrutiny.

The Financial Solution

He tried learning to prepare his financial statements through reading some blogs, going through some YouTube videos, and books but since it was not backed by practical implementation, all of those led to further confusion for him.

He approached us for his return filing and Tax audit, for his trading business in Stock Futures Derivatives.

Since he had a turnover which was more than Rs.25,00,000/-, He was falling under mandatory statutory compliance requirements to maintain his books of accounts.

We went ahead to explain to him and guide him through the entire process of preparing his financial statements using accounting software, which he found very easy to adopt and implement.

We recommended the use of accounting software for easy preparation of financial statements by importing his bank statements and his Broker/exchange ledger into the software to be able to see some quick results in 30 minutes.

It is a win-win situation for both of us, for him because he doesn’t need to outsource the preparation of financial statements, and already prepared financial statements create a base that helps us in focussing on statutory compliances and applying our technical knowledge in filing returns and tax audits.

We have trained many traders and finance professionals to date. The rule is simple, prepare financial statements specifically as per requirement. The most important financial figure which decides the outcome of eligibility for audit is the Turnover calculation.

Turnover is not the net result of trades done; it is calculated a bit differently in the case of Stock Futures derivatives, which is a sum total of all the favourable and unfavourable differences in the turnover. It’s extremely easy to find out the sum total once the client has imported the brokers/ exchange journal.

For example, when we buy tomatoes from the market, at Rs.40/ kg, we get some 10 pieces of tomato, but when we return home, we notice that 2 of them are rotten(unfavorable). But still, we have paid Rs.40 for all 10 tomatoes, good ones, and bad ones. Similarly, in stock futures derivative, turnover is the sum total of all favorable and unfavorable differences.

He was so excited to learn and prepare his Financial Statements, independently, since this was a regular requirement every year and easy to implement.

He had never prepared his financial statements before this one and was also unaware of some challenges that he may face before finally coming up with his first financial statements, independently. He was extremely keen to learn the art.

A lot of challenges and surprises

Preparation of financial statements required dedication to upskill oneself, thereby following the steps, which required some basic knowledge of handling and working using very basic excel sheets.

When it comes to preparing Financial Statements, not everyone actually knows that they can prepare their financial statements or are hesitant to even try one by themselves because of various reservations.

Also, understanding the framework of financial statements was overwhelming for him at the start. Like what comes before what in the final presentation.

The purpose of Trading & Profit and Loss a/c and Balance Sheet and the format of the figures forming part of these statements like incomes, expenses, assets, liabilities, receivables, payables, brings complete clarity of thoughts and made him comfortable gradually.

A few terms such as Derivative Business Income, Turnover, Mark to Market, and Initial Margins are a part and parcel of trading in Stocks Futures Derivative.

Critical choice

Rajesh was very clear that he had once achieved success in understanding the complex procedure to trade in Stock futures derivative, which itself looked like a big task at the start, he thought to himself, that if he can do it once he can do It again with the preparation of Financial Statements, which is much easier as compared to understanding market terminologies and actual trading in Stock Futures Derivative.

He modeled his own success.

Once he had decided to learn, he never went back on his words. Rajesh took every challenge positively and worked on it.

Climax

For once he was evaluating between the choice to outsource or learn for his own business. But it was his keen interest to learn a financial skill for a lifetime, which finally helped him achieve his dreams of preparing his financial statements, even after facing some challenges.

Resolution

Rajesh feels very confident regarding his finances after having learned the skill of preparing his own financial statements, and is also able to compute his taxes based on incomes reflected in his financial statements and is aware of the presentation in the Income Tax Returns, thereby transforming Rajesh from an ignorant taxpayer to a fully independent Accountant, even without being from an accounting background, for a lifetime.

He has achieved Accounting Independence!

I feel extremely happy to contribute to his learnings to help him achieve his dreams.

To be able to give back my learnings to society at large, I have written an ebook in the most practical way possible, so that readers can practically visualize and implement the preparation of financial statements, independently.

Right from the beginning to the end, it has been my constant endeavor to keep it as simple as possible for everyone to learn and achieve their Accounting Independence.

Do let me know if you are into Stock Futures Derivatives and wish to get a free copy of my ebook which will get launched within 2 months, in the comment section below.