Every company, whether large or small, listed or not, must keep proper books of account. The rule is in section 128 of the Companies Act, 2013, read with Rule 3 of the Companies (Accounts) Rules, 2014. The books are the base for the financial statements, the audit, the tax return, and the GST returns. If they are not in order, each of those suffers.
What must be kept
The company must prepare and keep at its registered office books of account and other relevant books and papers, and the financial statements, for every financial year. They must give a true and fair view of the state of the company’s affairs, including its branches, and explain the transactions at the registered office and the branches. The books must be kept on the accrual basis and the double-entry system of accounting.
Where they are kept
The default place is the registered office. The board may decide that the books are to be kept at another place in India, in which case the company must send notice of the address to the Registrar within seven days. Branch accounts are kept at the branch, and summarised returns are sent to the registered office at the intervals the Act provides.
How long they are preserved
Section 128(5) requires the books for not less than eight financial years immediately preceding a financial year, together with the vouchers relevant to any entry in them. Where the company is younger than eight years, all the years since incorporation are kept. These periods are the minimum under company law. Other laws, including tax law, may require records to be held for different periods, and records connected with a pending proceeding are kept until it is over.
Electronic books
A company may keep books in electronic form, subject to Rule 3. The rule, as amended, requires that:
- the books remain accessible in India at all times, so they can be used for later reference;
- they are retained complete and unaltered, in the format in which they were generated or in a format that shows the information accurately;
- there is a proper system for storage, retrieval, display, and printout;
- a backup of the books, including books kept outside India, is kept on servers physically located in India on a daily basis; and
- where the service provider is outside India, the company gives the Registrar the name and address of the person in India who controls the books.
Audit trail
For financial years starting on or after 1 April 2023, a company that uses accounting software to keep its books must use software that records an audit trail of each transaction, creates an edit log of each change with the date it was made, and cannot have that feature switched off. The statutory auditor reports on whether this requirement has been met. The audit trail must be preserved for the same period as the books.
Consequences of getting it wrong
If a company or its officers fail to keep proper books, section 128 provides for penalties on the company and on the officers responsible. A weak record also affects the auditor’s ability to form an opinion, and can lead to a qualified report.
Records to keep ready
- A complete set of ledgers, journals, and cash and bank books for each year
- Vouchers and invoices that support the entries, filed so they can be traced
- Details of where electronic books are hosted, who controls them, and where the daily backup is stored
- Board resolution and Registrar notice where books are kept at a place other than the registered office
- Evidence that the audit-trail feature of the software is enabled and has not been switched off