While you set up your business with grand fanfare, reaching your dream turn-over was just the first milestone and you have already begun to bother about the profitability? One key area where most start-ups fumble and dread is figures and accounts.

  • When do I start maintaining books of accounts?
  • Where to maintain and who will do it?
  • Can I maintain myself?

Maintenance of financial records is actually a way to know the true and fair position of your business. In reality, it is much more. It is also a legal requirement. Several laws are applicable on a business and a business is suppose to know and comply with each of them.

Let us understand the requirement and the need for the compulsory maintenance of accounts and audit as per Indian Income Tax Act in a simplified manner:

AS PER INCOME TAX ACT, BOOKS OF ACCOUNTS ARE COMPULSORY FOR:

TYPE OF ORGANIZATION

WHAT IT INCLUDES

BOOKS ARE

Company under Companies Act

Private & Public Company LLP, One Person company and  all other types of companies

               MANDATORY

Charitable Institutes

Not for profit organizations/ NGO

 MANDATORY

Specified Professionals

For Individuals/ Proprietors/ HUF and Partnership who fall in specified professional category

MANDATORY if gross receipts exceed Rs 150,000/-

Non Specified Professionals

Individuals, HUF and Partnerships

Subject to conditions 

WHO IS A SPECIFIED PROFESSIONAL?

 Specified Professionals includes persons rendering services and having technical degrees in

  1. Legal
  2. Medical
  3. Engineering
  4. Architectural/Interior, Accountancy
  5. Technical Consultancy,
  6. Information Technology,
  7. Film Artists 
  8. Any other person as notified by government.

E.g.: lawyers, doctors, architects, interior designers, engineers, chartered accountants, film artists, consultants etc. Specified Professionals are non traders.

If you are a specified professional, you are required to maintain books of accounts if your gross receipts from the profession exceed Rs 150,000/-

 Non Specified Professionals include persons:

  1. Who render services to others but do not have a technical degree and are not covered in the above notified professionals 
  2. All the retailers and traders. In other words every business other than ones in specified category.

Let us understand the  2 parameters :

There are two parameters, which form the eligibility criterion-

  1. Turnover- which means gross sales/ gross receipts of a business
  2. Income:  Net Profit made after all allowable deductions.

For eg: A business sells cloth worth Rs 7 lakhs in a year. This is not the profit- but is  the turnover of a business. After meeting all the business expenses its net profit is Rs 120,000/- ( Income from business is Rs 120,000/-)

FEW IMPORTANT PROVISIONS AND QUESTIONS     

If you are registered with VAT and Service Tax, maintenance of books of accounts become mandatory so as to enable tax authorities to check proper levy of tax on consumers. Though, VAT and Service Tax Authorities are not checking expenses and net profit, the focus is on gross receipts and the bills/invoices raised.

MANUAL OR ELECTRONIC MODE

  • Books or books of accounts can be maintained both manually as well as in electronic form also by an accounting software. (Print out is not compulsory)
  • Manual Accounts are difficult and making changes and corrections very difficult.
  • Computerized accounts are relatively easier to maintain.

WHAT TO MAINTAIN?

No List is provided by the Government which means you are required to maintain every possible document in relation to business.

  •   Cash book/ Ledger/ Journal
  •   Inventory Records
  •   Bank statements
  •   Original Bills
  •   Receipts/Counterfoils of sales
  •   Vouchers for payments

WHERE CAN THE BOOKS BE MAINTAINED?

Running Financial Year:

The current year’s books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F (3).

Previous Financial Years:

There is no specific rule as to where the books of accounts of earlier years should be kept. In case you have branches, books of accounts can be either maintained at respective branches or at one place i.e. the registered office.

FOR HOW MANY YEARS?

Every year the record of books of accounts increases and the cupboards get  filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts? This varies for business subject to what kind of entity it is but broadly it is advised to keep records for up to 8 years

WHEN IS TAX AUDIT APPLICABLE?

KEY POINTS:

  • All Companies have to get statutory audit done compulsorily under Companies Act but tax audit is applicable only when the threshold limit is crossed
  • Individuals, HUF and Partnership firms are under tax audit only when the threshold limit is crossed or in exceptional cases *
  • Failure to get maintain books of accounts and failure to get accounts audited invites heavy penalties*

*The article is meant for general understanding of the provisions. You are requested to consult the author for your case.

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