Without formal training in commerce or business administration, decoding your society’s financial statements might feel daunting. These tips will equip you to approach them with clarity and confidence.
Cash v/s Accrual
There are two primary methods of accounting:
- Cash Basis
- Accrual Basis
Housing society accounts are typically maintained using the accrual basis method.
Let’s consider your society’s Passenger Lift AMC, for which you pay ₹1,10,000 annually to a vendor. The contract period spans July 1st to June 30th.
You won’t see the full ₹1,10,000 reflected directly in the financial statements. Instead, the amount is split across two accounting periods:
- ₹82,500 is allocated as AMC expense from July 1st to March 31st
- ₹27,500 is treated as AMC expense from April 1st to June 30th
Here’s how it appears in the books:
- The ₹27,500 portion (April to June) is recorded on the asset side of the balance sheet as ‘Prepaid Expenses’
- The ₹82,500 portion is added to the previous year’s prepaid expenses, and the total is shown in the Income and Expenditure Statement under ‘Passenger Lift AMC’
Capitalisation
Suppose your society purchases a new water pump for ₹25,000. Although the payment is made in the current financial year, you won’t see the full amount listed as an expense in the Income and Expenditure Statement.
Why? Because the pump is expected to serve the society for 8–10 years, and it would be inaccurate to treat the entire cost as a one-time expense. Instead, the pump is classified as an asset, and its cost is gradually expensed through annual depreciation.
Here’s how it works:
- Year 1:
- Depreciation @ 15% of ₹25,000 = ₹3,750
- The pump’s book value reduces to ₹21,250
- Year 2:
- Depreciation @ 15% of ₹21,250 = ₹3,187.50
- Book value becomes ₹18,062.50
And so on, until the asset is fully depreciated over its useful life.
This method ensures that expenses are matched with the period in which the asset is used, providing a more accurate financial picture.