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  • Divyanshita Singh

Sec 128: What books of accounts are to be kept by a company?

Updated: Oct 4, 2022

What are books of accounts to be kept by a company?


(The Companies Act, 2013 (SECTION 128), The Companies (Accounts) Rules, 2014)

The shareholders provide capital to the company and are deemed the company's owners, but they cannot all participate in managing the company's affairs. Directors manage the company, and annual information about the company's operations and financial position is disclosed to shareholders. Section 128 of the Companies Act of 2013 specifies the books of account and other records that the company must keep.

The term "books of account" refers to the records kept by the company to record the specified financial transaction. It is specifically stated that every company must keep proper books of account. The following are the main characteristics of proper books of account:

i. The company must keep books of account for the items specified in clauses I to (iv) of sub-section 2(13) of the Companies Act, 2013, which defines "books of account."

ii. The books of account must show all money received and expended, sales and purchases of goods, as well as the company's assets and liabilities.

iii. The books of account must be kept on an accrual basis and using the double-entry system.

iv. The books of account must provide a true and fair view of the state of the affairs of the

iv. company or its branches.

Section 2(13) defines "books of account" as records kept in relation to—

i. All sums of money received and expended by a company, as well as the matters relating to which the receipts and expenditure occur;

ii. All of the company's sales and purchases of goods and services;

iii. The company's assets and liabilities; and

iv. The cost items prescribed in section 148 in the case of a company that belongs to any of the classes of companies specified in that section.

Place of Keeping Books of Account

Section 128(1) requires every company to prepare and keep its books of account and other relevant books, papers, and financial statements at its registered office. However, the Board of Directors may decide to keep all or some of the books of accounts in another location in India. When the Board so decides, the company must file a written notice with the Registrar within seven days of that decision, giving the full address of that other place.

Maintenance of Books of account in electronic form

The maintenance of books of account and other books and papers in electronic mode is

permitted and is optional. The Companies (Accounts) Rules, 2014 Rule 3 requires that such books of accounts or other relevant books or papers kept in electronic form remain accessible in India and usable for future use (1).

The information contained in the records must be retained completely in the format in which they were generated, sent, or received, or in a format that accurately presents the information generated, sent, or received, and the information contained in electronic records must be complete and unaltered (Companies (Accounts) Rules, 2014 Rule 3(2)).

The information received from branch offices must not be altered and must be kept in such a way that it reflects what was originally received from the branches, according to Rule 3 of the Companies (Accounts) Rules, 2014. (3).

The information in the electronic record of the document must be legible, according to Rule 3 of the Companies (Accounts) Rules, 2014. (4).

There shall be a proper system in place for storing, retrieving, displaying, or printing electronic records as the Audit Committee, if any, or the Board deems appropriate, and such records shall not be disposed of or rendered unusable unless permitted by law:

However, a periodic backup of the company's books of account and other books and papers maintained in electronic mode, including at a location outside India, shall be kept in servers physically located in India. Rule 3 of the Companies (Accounts) Rules, 2014 (5)

When filing financial statements, the company must notify the Registrar on an annual basis –

(a) the service provider's name;

(b) the service provider's internet protocol address;

(c) the service provider's location (where applicable);]

(d) where the books of account and other books and papers are kept on the cloud, the service provider's address (Rule 3(6)).

Books of Account in Respect of Branch Office

The company's branches, whether in India or abroad, must keep the books of account in the same manner as specified in sub-section (1) for the transactions conducted at the branch office. Furthermore, the branch offices must send the proper summarised return to the company at its registered office at quarterly intervals and keep it open to directors for inspection.

Accrual basis and Double-entry system of accounting

Subsection (1) requires that books of account be kept on an accrual basis and in accordance with the double-entry system of accounting.

The accrual concept is one of four accounting principles that involves recording income and expenses as they accrue rather than when they are received or paid. This method associates revenues and expenses with specific periods, such as a month or a year. It records them as 'incurred' alongside acquired assets, regardless of the date of actual receipt or payment of cash in any form.

Double-entry bookkeeping is a method of recording any business transactions in a set of accounts in which the debit entries/amount must equal the credit entries/amount for each transaction recorded.

Inspection by directors

According to Section 128, any director may inspect the company's books of accounts and other books and papers during business hours. Section 2(12) defines the term "Books and Papers" to include accounts, deeds, vouchers, writings, and documents. As a result, the company must make the aforementioned books and papers available for inspection by any directors. Any type of director-nominee, independent, promoter or full-timer can conduct such an inspection.

Under this section, only the directors have the authority to inspect books of accounts and other books and papers.

Period for which books to be preserved

The books of accounts and any vouchers relevant to any entry in such books must be kept in good order by the company for at least eight years immediately preceding the relevant fiscal year. In the case of a company formed less than eight years before the fiscal year, the books of accounts for the entire period preceding the fiscal year and the vouchers must be preserved.

Persons responsible for maintaining books

The person responsible for taking all reasonable steps to ensure that the company complies with the requirement of books of accounts etc. shall be: (sub-section 6)

(i) Managing Director,

(ii) Whole-Time Director, in charge of finance

(iii) Chief Financial Officer

(iv) Any other person of a company charged by the Board with the duty of complying with provisions of section 128.

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