A company raises capital through its shareholders who invest their money for the smooth running of the business. Thus, the shareholders have all the fundamental right to know about the true and fair financial position of the company. However, they are unable to take part in the day-to-day management of the company. Consequently, the company is legally mandated to prepare and maintain proper books of accounts of the company. This in turn helps the shareholders to make informed decisions and strengthens investor confidence.
According to Section 2(13), The books of accounts of the company include-
1. All the receipts and expenditures, taking place.
2. Sales and purchases of goods and services by the company.
3. Assets and liabilities of the company
4. Items of cost as prescribed under section 148 in the case of a company belonging to any class of companies as specified under that particular section.
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Maintenance of the books of accounts
The books of accounts and any other relevant books and papers explaining the transactions taking place at the registered office and its branches shall be kept on an Accrual basis and according to the double-entry system of Accounting. It shall give a true and fair view of the company’s financial position bolstering the shareholder confidence. These shall be kept at the registered office of the company.
A company can also keep its books of accounts at a place other than its registered office by complying with the following points
1. Books of accounts on any other relevant papers may be kept at any other place as decided by the board of directors of the company.
2. According to Rule 2A of Accounts rules, Within seven days, the company shall give notice in writing in Form AOC 5 to the registrar, mentioning the full address of the place where the books of account have been kept.
A company may also keep its books of accounts and other important papers in electronic mode and shall make them accessible in India to be made usable for subsequent references.
Mandatory Audit Trail for Accounting Software
Every company that uses accounting software to maintain their books of accounts, on or after 1st April 2022 (i.e. From the 1st day of April 2022) is required to use such accounting software which has the feature of recording the Audit Trail of every transaction, thereby creating an edit log of every change being made in the books of accounts along with their specific dates and changes made.
All relevant books shall be retained in the format in which they were originally generated, sent, or received. Also, the information being received from branch offices shall not be altered and be kept in a manner that shall depict what was originally received.
Books of accounts of Branch Office
A company having a branch office in India or outside of India is deemed to have complied with the provisions of the Companies Act 2013 if proper books of accounts leading to the transactions, taking effect at the branch office are kept at the office and its proper summarised returns are sent periodically to the company at its registered office or any other place where the books of accounts has been kept.
Inspection by the directors
1. The books of accounts and other relevant papers being maintained in India shall be open for inspection by the Director during business hours at the registered office of the company or at any other place where the books have been kept.
In N.V. Vakharia vs. The Supreme General Film Exchange Co. Ltd., It was mentioned that the Director’s right to appoint an agent to inspect books of accounts. The director has the right to inspect the books of accounts personally or through an agent provided that there is no objection to the person chosen by him, and the agent does not use the information for any purpose, other than the purpose of the principle that is the director.
Financial information maintained outside of India
Summarized returns of the books of accounts maintained outside India shall be sent to the registered office on quarterly intervals and it shall be maintained at the registered office of the company, which shall be open to the director for inspection.
The director of the company himself can also request the company to provide full details of the financial information being maintained outside the country. The company shall produce such financial information to the director within 15 days of the date of receipt of such written request.
Provided that the inspection of any subsidiary of the company shall only be done by the person authorized on this behalf by passing a resolution at the board meeting.
Statutory timeline for keeping records!
The company shall preserve the books of accounts for not less than 8 years (i.e. for at least 8 years) and in case of a company being in existence for less than 8 years than for all the preceding years of its existence.
Fine for Contravention!
If the company fails to comply with the provisions then it may lead to a minimum fine of ₹50,000 and a maximum fine of ₹5,00,000 on the persons responsible for the maintenance of books of accounts. ( MD, WTD, CFO, or any other person authorized by the board).
Therefore, According to Section 128(1) of The Companies Act 2013, every company is required to prepare and maintain the books of accounts and other relevant books to provide a true and fair view of the financial affairs of the company.
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