Demonetization and Business Accounting – How does it Tally?

On 8^th Nov 2016, India’s Prime Minister announced demonetization of Rs 500 and Rs 1000 currency notes. This news came as a surprise to many of us! However, if you carefully think through the sequence of measures undertaken by the Government such as opening of bank accounts, linking with Aadhar numbers, introducing the tax amnesty program, announcing a warning for defaulters and so on, you will see a pattern that makes you believe this was well planned.

On the heels of the demonetization, on 20^th Nov, the IT department announced that it would send notices to anybody who deposits more than Rs 2.5 lakhs into bank accounts.


Now, what does this mean for a business? It signals that the Government is very serious, and is willing to take bold measures to ensure compliance. It also means that the tax department is already using the power of IT to process large amounts of data from banks in order to identify individuals who deposited more than Rs 2.5 lakhs across different bank branches in a day. Most significantly, it signals the Government’s willingness to make IT the backbone to implement the law.

How has demonetization affected small businesses

Bhaskar is the owner of my neighbourhood kirana store in Malleshwaram, Bengaluru. His business mainly operates with cash. He does not maintain books of account. Home delivery orders come via phone and WhatsApp, for which payment happens after delivery. Some of his regular customers settle payments once a month. His accountant calculates his taxes on a yearly basis before paying tax.

On 10^th Nov, Bhaskar visited his bank to deposit cash as usual, and he was surprised that he was asked to explain! In the absence of any accounting practice, this is suddenly a difficult situation since the cash amount was more than what he normally declares as his income.

What if Bhaskar had maintained a simple discipline of recording payments and receipts? His own books of account would then have been used by accountant to calculate taxes. It would have been easy for Bhaskar to explain his cash position using his books of accounts.

The easiest way for a business to remain compliant is to start recording payment and receipt transactions. By bringing such discipline into recording transactions, a business can track buyers, sellers, payables, receivables, payments, receipts, and also reconcile them with bank statements. When in doubt on whom to pay, isn’t it so much easier, if you know who else to pay, what is the order of priority, how much cash is in the bank, and how many payments are due in the next few days?

Uncertainties of changing business conditions will have lesser impact when you can quickly understand its consequence and take decisions reliably. The simplest way to start keeping books of account is to start using an accounting software. If your business is not yet automated, it is highly advisable to start using an accounting software as the first step. This will also help you be prepared and ready when GST rolls out in a few months.

Due to the ongoing currency crunch, many businesses have started accepting payments through plastic cards, online bank transfer and mobile wallets. What is impact of these e-payments on business? Is there a larger play which will impact the way businesses will evolve and stay compliant? Stay tuned for more!