One of the key obligations of any company registered in India is to maintain proper books of accounts, as prescribed under the Companies Act, 2013. The Act mandates that every company, regardless of its size, must maintain accurate records of its financial transactions, which should provide a clear picture of its financial health. In this article, we will discuss the legal provisions related to the maintenance of books of accounts, various forms to be filed, and financial concepts that are relevant for companies to comply with the Act.
Legal Provisions for Maintenance of Books of Accounts
Section 128 of the Companies Act, 2013 mandates every company to maintain proper books of accounts. The books of accounts should be kept at the registered office of the company or at any other place where the Board of Directors decides. The books of accounts should be kept in such a way that they give a true and fair view of the state of affairs of the company. The books of accounts should be kept on accrual basis and should be in accordance with the double-entry system of accounting.
The books of accounts should be kept for a period of not less than eight financial years. In case of any ongoing legal proceedings or any investigation initiated by the government, the books of accounts should be maintained till the completion of such proceedings.
Companies Act, 2013 also requires that companies maintain various other books and registers such as a register of members, a register of shares, a register of directors and key managerial personnel, a register of charges, a register of debenture holders, etc.
Forms to be Filed
Companies Act, 2013 also mandates that companies file various forms related to the maintenance of books of accounts. Form AOC-4 is a form that companies need to file annually with the Registrar of Companies. This form contains information about the financial statements of the company, including the balance sheet, profit and loss account, and cash flow statement. The financial statements should be prepared in accordance with the accounting standards notified by the Ministry of Corporate Affairs.
In addition to Form AOC-4, companies also need to file Form MGT-7, which contains information about the Annual General Meeting (AGM) of the company. This form should be filed within 60 days from the date of the AGM.
Financial Concepts Relevant for Companies
There are various financial concepts that are relevant for companies to maintain proper books of accounts. These include:
i. Accrual Basis of Accounting: The accrual basis of accounting recognizes revenue when it is earned, and expenses when they are incurred. This means that even if the company has not received payment for the goods sold or services rendered, it should still recognize the revenue in its books of accounts.
ii. Double-Entry System of Accounting: The double-entry system of accounting is a system where every transaction is recorded in at least two accounts, i.e., a debit and a credit account. This ensures that the books of accounts remain in balance and helps to detect any errors or frauds.
iii. Accounting Standards: The Ministry of Corporate Affairs has notified various accounting standards that companies need to follow while preparing their financial statements. These standards provide guidelines on various aspects of financial reporting, such as revenue recognition, inventory valuation, depreciation, etc.
iv. Cash Flow Statement: A cash flow statement is a statement that shows the inflow and outflow of cash in a company during a particular period. It helps to understand the liquidity position of the company and its ability to meet its short-term obligations.
The maintenance of books of accounts is an essential requirement for every company registered in India. Proper books of accounts not only ensure compliance with the law but also help in making informed business decisions. Companies should ensure that they maintain accurate and complete.