The Bank Statements of your business is the foundation based on which books of accounts are prepared. However, a Bank Statement with no proper remarks creates more problems than solving one. A typical bank statement issued by an Indian Banker contains only a few columns. The information which you may gather from a bank statement is only very basic information such as date, transaction reference numbers, amount, and finally, whether it is deposit or withdrawal. It does not contain necessary information such as the Full name of the Party and the purpose of the transaction. Please refer to a Bank Statement from HDFC Bank for the use of reference. In the below image, you can see that the Bank Statement contains only a few pieces of information only.
For the purpose of accounting each and every transaction must be identified by party name and the reason for such transaction. You would agree that under a double-entry system of accounting when the money is received in the bank account then the bank account is debited and correspondingly we have to credit the party from where money has come into the bank statement. Similar credit/debit treatment is required for payments/withdrawals. In view of the same please add four new columns to your bank statement
- Name of Party
- Transaction Purpose
- Invoice Number (if Income)
- Bill Status (If Expense)
You may use above format and prepare the details of the transactions of the bank statement. You should make a habit of maintaining the records as explained in this post. Apart from this please pay attention to following paragraphs for the Best Practice relating to Income, Expense & Staff payments for your business.
Best Practice related to Income
The Income of the business should be generated out of an Invoice, if you are registered under GST then the invoice shall be known as Tax Invoice and it must meet the requirements of law. The flow of activities for every income is as under (Best Practice)
- Define the terms of agreement resulting in income or income stream. We always recommend our clients to have a formal agreement signed clearly mentioning the responsibilities of either party and the terms of payment.
- Based on the understanding of the party raise an Invoice, and in case invoice can be raised only after the project is over then generate an estimate.
- Always remember to levy GST at the applicable rate and show separately in a separate column against each item
- Ensure that the invoice is signed by the authorised person as registered under GST
- When you receive the payment in the Bank Enter the name of the party, purpose as “Payment received against Invoice Number —”
- Remember to pay GST Levied for the month in which the Invoice was raised. The receipt of payment is immaterial.
- In case the party has deducted TDS keep take note of the same. Obtain Form 16A from the party for the TDS Deducted.
Best Practice related to expenses
The expenses of the business must be recorded carefully and while making the payment do remember to deduct the applicable TDS. Please visit our webpage for updated TDS Rates on various expenses. The important points are as under.
- Always insist for signed bills/tax invoices from vendors
- TDS Deduction (if applicable) is mandatory
- Record the party name and bill number on the Bank Statement Sheet
Best Practices related to Employees
- Prepare monthly payroll sheet
- Deduct proper TDS
- Deduct professional tax at applicable rate (if applicable)
- Comply with PF and ESIC related provisions.
- Mark the payments relating to staff in the bank Statement
For any assistance, please contact us. we would be glad to help you.