In company law, the book of accounts refers to the records that companies are required to maintain to track their financial transactions and activities. The purpose of maintaining a book of accounts is to provide an accurate and complete record of the Company’s financial position, performance, and cash flows. In this blog, we will discuss about the concept of Books of Accounts and its maintainability in a company.
Overview of Maintenance of Books of Accounts
Maintaining books of accounts refers to the process of keeping accurate and up-to-date records of all financial transactions of a business. The Companies Act, 2013, governs the maintenance of books of accounts in India.
Types of Books to be maintained:
A company is required to maintain the following types of books:
- Cash Book
- Journal
- Ledger
- Purchase Book
- Sales Book
- Stock Register
According to this act, every Company is required to keep and maintain the books of accounts as mentioned below:
- Books of Account: Every Company must maintain a book of account that records all its financial transactions, including income, expenses, assets, liabilities, and equity. These records must be kept in a manner that provides a true and fair view of the state of the Company’s affairs.
- Cost Records: Companies engaged in the production, processing, manufacturing, or mining of goods must maintain cost records. These records provide details of the cost of production, cost of sales, and other expenses related to the Company’s activities.
- Securities Register: A securities register is a record of all the securities issued by the Company, including shares, debentures, and bonds. This register must be kept up-to-date and accurate to ensure that the Company can provide a complete and accurate record of its securities to investors and regulators.
- Minutes Books: A minute’s book is a record of the proceedings of meetings of the board of directors and shareholders of the Company. These records must be maintained to provide a complete and accurate record of the decisions made by the Company’s management and owners.
- Register of Contracts: A register of contracts is a record of all the contracts entered into by the Company. This register must be maintained to ensure that the Company complies with its contractual obligations and can provide a complete and accurate record of its contractual relationships to investors and regulators.
- Register of Directors & Key Managerial Personnel: This register is a record of all the directors & key managerial personnel of the Company, including their names, addresses, and other details. This register must be maintained to ensure that the Company complies with its legal obligations and can provide a complete and accurate record of its management structure to investors and regulators.
Companies are required to maintain their books of accounts at their registered office or at any other place as the board of directors may decide. The books of accounts must be kept for at least eight years from the end of the financial year to which they relate.
List of Items That Are Included In the Books of Accounts
Books of accounts are the records maintained by businesses to track their financial transactions. They serve as the primary source of information for preparing financial statements and reports.
The following are the items typically included:
- Journal Entries: These are the records of all financial transactions of the business. Each transaction is recorded as a journal entry, which includes the date, amount, accounts affected, and a brief description of the transaction.
- Ledger Accounts: These are accounts that summarize the transactions recorded in the journal entries. The ledger accounts are organized by account type, such as assets, liabilities, equity, revenue, and expenses.
- Cash Book: This is a record of all cash transactions, including receipts and payments.
- Sales Book: This is a record of all sales made by the business.
- Purchase Book: This is a record of all purchases made by the business.
- Inventory Records: These records include information on the inventory levels, purchases, sales, and cost of goods sold.
- Bank Statements: These are records of all bank transactions, including deposits, withdrawals, and bank fees.
- Payroll Records: These records include information on employee wages, taxes, and other deductions.
- Fixed Asset Register: This is a record of all fixed assets owned by the business, including the purchase date, cost, and depreciation.
Overall, books of accounts are a comprehensive set of records that provide an accurate and detailed picture of the financial health of a business.
How You Can Create A Book Of Accounts?
Creating this is an essential task for any business to keep track of their financial transactions. Here are the general steps to follow to create books of Company’s account:
Step 1: Identify The Type of Accounts Needed: The first step is to determine the types of accounts needed based on your business activities. Some common accounts include cash, accounts payable, accounts receivable, inventory, and expenses.
Step 2: Create a Chart of Accounts: Once you have identified the accounts needed, create a chart of accounts, which is a list of all the accounts and their corresponding account numbers.
Step 3: Reconcile Accounts: Record all financial transactions in the appropriate account using double-entry bookkeeping, which means recording both the debit and credit side of the transaction.
Additionally One Can Also Follow These Steps For Company’s Book-Keeping:
- Prepare Trial Balance:
Prepare a trial balance to ensure that the total debits and credits are equal.
- Prepare Financial Statements:
Use the information in the books of accounts to prepare financial statements, including the income statement, balance sheet, and cash flow statement.
- Reconcile Accounts:
Regularly reconcile accounts to ensure that the balances in the books of accounts match the balances in the bank statements and other financial records.
- Close The Books:
At the end of each accounting period, close the books by transferring the balances in temporary accounts, such as revenue and expenses, to the appropriate permanent accounts.
It’s important to note that creating books of Company’s accounts can be a complex task, and it’s essential to maintain accuracy and consistency in recording financial transactions. Consider hiring a professional accountant or using accounting software to ensure your books of accounts are accurate and up to date.
Primary Aspects to Maintain the Company’s Books of Accounts
The records mentioned in the books of accounts can be used to create financial statements, track expenses, and make informed business decisions.
The Following Are The Important Aspects Of Maintaining Books Of Accounts:
- Record-Keeping:
The first step in maintaining books of Company’s accounts is to keep a record of every financial transaction. This includes all purchases, sales, payments, receipts, and other financial transactions. The records should be kept in a systematic and organized manner.
- Accounting Software:
It is recommended to use accounting software to maintain books of Company’s accounts as it helps in making the process more efficient and accurate. There are various accounting software available in the market, such as QuickBooks, Xero, and FreshBooks, which can automate many tasks, including invoicing, billing, and tracking expenses.
- Chart of Accounts:
A chart of accounts is a list of all the accounts used by the business to record financial transactions. It helps in categorizing transactions and generating financial reports. The chart of accounts should be created in a way that makes sense for the business and is easy to understand.
- Bank Reconciliation:
It is important to reconcile the bank account regularly to ensure that the records in the books of accounts match with the bank statement. Any discrepancies should be resolved immediately to avoid any financial errors.
- Financial Statements:
Financial statements are a summary of the financial transactions of a business. They include the income statement, balance sheet, and cash flow statement. These statements help in understanding the financial health of the business and making informed decisions.
- Auditing:
Auditing is the process of reviewing the books of accounts to ensure that they are accurate and comply with accounting standards. It is recommended to get the books of accounts audited annually by a certified public accountant (CPA).
- Compliance:
It is important to comply with all the applicable tax laws and regulations while maintaining books of accounts. This includes filing tax returns, paying taxes on time, and keeping accurate records for tax purposes.
In summary, maintaining books of Company’s accounts is an essential task for any business. It helps in understanding the financial health of the business, making informed decisions, and complying with the applicable tax laws and regulations. It is important to keep the records accurate, up-to-date, and organized to ensure the success of the business.
Few Rules to Keep In Mind While Maintaining Company’s Books of Accounts
As per the Companies Act 2013[1], every Company is required to maintain proper books of accounts and records. The rules regarding maintaining company accounts can be summarized as follows:
- Method of Accounting: A company can use either the accrual or cash basis of accounting. However, once a method is chosen, it must be consistently followed.
- Time Period of Maintaining Books: The books of accounts must be maintained for a period of at least eight years from the end of the financial year.
- Place of Maintaining Books: The books of accounts can be maintained at the registered office of the Company or at any other place as approved by the Board of Directors.
- Preparation and Presentation of Financial Statements: The Company must prepare and present financial statements, including the balance sheet, profit and loss account, and cash flow statement, as per the prescribed format and standards.
- Audit of Financial Statements: Every Company is required to get its financial statements audited by a qualified auditor. The auditor’s report must be presented along with the financial statements.
- Disclosure Requirements: The Company must disclose various information in its financial statements, including related party transactions, contingent liabilities, and accounting policies.
It is important to note that the above rules are not exhaustive and may vary based on the size, nature, and type of the Company. Companies should consult with their legal and accounting advisors to ensure compliance with all applicable rules and regulations.
Effects of Not Maintaining the Company’s Books of Accounts
Not maintaining books of accounts in a company can have several negative effects, including:
- Legal Consequences: Not maintaining books of accounts is a violation of accounting and taxation laws in most countries. Companies that do not comply with these regulations may face penalties, fines, and legal action.
- Financial Management: The absence of proper bookkeeping can make it difficult to keep track of a company’s finances. Without accurate financial records, it is challenging to make informed business decisions, such as determining the profitability of a product or service, tracking expenses, and identifying areas where costs can be reduced.
- Taxation: Without proper accounting records, it may be difficult to calculate the correct amount of taxes owed to the government. Inaccurate tax reporting can lead to penalties, fines, and other legal issues.
- Funding: Banks and other lenders may require companies to submit financial statements and other accounting records as part of the loan application process. Without these records, it may be challenging to obtain funding.
- Investor Relations: Investors and stakeholders rely on accurate financial information to make investment decisions. Without proper bookkeeping, it can be challenging to attract new investors or retain existing ones.
Conclusion
The concept of the book of accounts in company law refers to the records that companies must maintain to provide an accurate and complete record of their financial transactions and activities. Companies are required to maintain various types of books of accounts, including books of account, cost records, securities register, minutes books, register of contracts, and register of directors and key managerial personnel. These records must be kept up-to-date and accurate to ensure that the Company complies with its legal obligations and can provide a complete and accurate record of its financial position, performance, and cash flows to investors and regulators. In summary, not maintaining books of accounts can have serious consequences for a company. It can lead to legal and financial issues, as well as hinder the ability to make informed business decisions, secure funding, and maintain investor relations.
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