Provisions Relating to Books of Account - 1 | Company Law - B Com PDF Download

Maintenance of Books of Accounts (Section 128)

According to Section 2(13) of the Companies Act, 2013, “Books of Account” includes records maintained in respect of:

(i) All sums of money received and expended by a company and matters in relation to which receipts and expenditure take place;

(ii) All sales and purchases of goods and services by the company ;

(iii) The assets and liabilities of the company; and

The items of costs as may be prescribed under Section 148 in the case of a company which belongs to any class of companies specified under that section

Section 128 of the Companies Act, 2013 provides for Books of account, etc., to be kept by the company. This provision came into force from 1st April, 2014. This Section provides:

Maintenance of books of accounts [Section 128 (1)]

(a) Every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any.

(b) The company shall be in a position to explain the transactions effected both at the registered office and its branches.

(c) Such books of Account shall be kept on accrual basis and according to the double entry system of accounting.

Place of maintenance of books of account [Section 128 (1)]

(a) The books of account and other relevant papers are required to be kept at the registered office of the company.

(b) The company may also keep all or any of the books of account at any other place in India as the Board of directors may decide. In such a case, the company shall file with the Registrar of Companies, a notice in writing giving the full address of that other place within 7 days of the Board’s decision.

Electronic form of Books of account [Section 128 (1)]

(a) Rule 3 of the Companies (Accounts) Rules, 2014 provides that the company may keep its books of account or other relevant papers in electronic mode.

(b) The books of account and other relevant books and papers maintained in electronic mode shall:

1. Remain accessible in India so as to be usable for subsequent reference.
2. Be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.
3. The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches.
4. The information in the electronic record of the document shall be capable of being displayed in a legible form.
5. There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.
6. The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.

(c) The company shall intimate to the Registrar on an annual basis at the time of filing of financial statement: 

1. The name of the service provider.
2. The internet protocol address of service provider.
3. The location of the service provider (wherever applicable).
4. Where the books of account and other books and papers are maintained on cloud, such address as provided by the service provider .

Proper books of account in relation to a branch of the company [Section 128(2)]

Where company has a branch office in India or outside India, proper books of account relating to the transactions effected at the branch office may be kept at that branch office.

Provided, proper summarised returns periodically must be sent by the branch office to the company at its registered office or the other place as decided by the Board of directors.

Persons who can inspect [Section 128 (3) and (4)]

(a) The books of account and other books and papers maintained by the company within India shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours.

(b) In the case of financial information, if any, maintained outside the country, copies of such financial information shall be maintained and produced for inspection by any director subject to such conditions as prescribed under the Rule 4 of the Companies (Accounts) Rules, 2014 which provides that:

1. The summarised returns of the books of account of the company kept and maintained outside India shall be sent to the registered office at quarterly intervals, which shall be kept and maintained at the registered office of the company and kept open to directors for inspection.
2. Where any other financial information maintained outside the country is required by a director, the director shall furnish a request to the company setting out the full details of the financial information sought, the period for which such information is sought.
3. The company shall produce such financial information to the director within 15 days of the date of receipt of the written request.
4. The financial information required under Sub-rules (2) and (3) above shall be sought for by the director himself and not by or through his power of attorney holder or agent or representative.

(c) The inspection in respect of any subsidiary of the company shall be done only by the person authorised in this behalf by a resolution of the Board of Directors.

(d) The officers and other employees of the company shall give to the person making such inspection all assistance in connection with the inspection which the company may reasonably be expected to give.

Period of Maintenance [Section 128 (5)]

(a) The books of account of every company together with the vouchers relevant to any entry in such books of account shall be kept in good order by the company for a minimum period of 8 financial years immediately preceding a financial year.

(b) Where the company had been in existence for a period of less than 8 years, it shall maintain the books of account in respect of all such preceding years in good order.

(c) Where an investigation has been ordered in respect of the company, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit.

Persons responsible for Maintenance & Penalty [Section 128 (6)]

(a) The following persons are responsible for the maintenance of proper books of account:

1. The managing director, the whole-time director in charge of finance, the Chief Financial Officer, or
2. Any other person of a company charged by the Board.

(b) If any of the persons mentioned above contravenes provisions of this Section, they shall be punishable with: 

1. Imprisonment for a term which may extend to 1 year, Or
2. Fine which shall not be less than Rs 50,000 but which may extend to Rs 5 lakh, or
3. Both with imprisonment and fine.

Financial Statement [Section 129] 

(a) As per the definition of Financial Statement under Section 2(40), ‘financial statement’ in relation to the company includes:-

1. A balance sheet as at the end of the financial year
2. A profit & loss account, or in case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;
3. Cash Flow Statement for the financial year;
4. A statement of changes in equity, if applicable; and
5. Any explanatory note annexed to or forming part of any document referred above.

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include Cash Flow Statement.

(b) Section 129(1) provides that the financial statements shall: 

1. Give a true and fair view of the state of affairs of the company or companies,
2. Comply with the accounting standards notified under Section 133 and,
3. Shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.
4. However, the items contained in such financial statements shall be in accordance with the accounting standards.

(c) The above provisions relating to form and content of financial statement shall not apply to following companies: 

1. Insurance Companies, or
2. Banking companies, or
3. Company engaged in the generation or supply of electricity, or
4. Any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company.

(d) If the following disclosures are not made, the financial statements shall not be treated as not disclosing a true and fair view of the state of affairs of the company: 

1. In case of Insurance Company, matters which are not required to be disclosed by the Insurance Act, 1938, or the Insurance Regulatory and Development Authority Act, 1999.
2. In case of Banking Company, matters which are not required to be disclosed by the Banking Regulation Act, 1949.
3. In case of Company engaged in the generation or supply of electricity, matters which are not required to be disclosed by the Electricity Act, 2003.
4. In case of company governed by any other law, matters which are not required to be disclosed by that law.

(e) Here, any reference to the financial statement shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act. 

Laying of financial statements at Annual General Meeting [Section 129(2)]

At every annual general meeting of a company, the Board of directors of the company shall lay before such meeting the financial statements for the financial year.

Consolidated Financial Statements [Section 129(3) & (4)]

(a) Where a company has one or more subsidiaries, it shall, in addition to its own financial statements prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own.

(b) The Consolidated financial statements shall also be laid before the annual general meeting of the company along with the laying of its own financial statement.

(c) The company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries in Form AOC-1.

(d) For the purposes of consolidated financial statements, subsidiary shall include associate company and joint venture.

(e) According to Rule 6 of the Companies (Accounts) Rules, 2014, the consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III to the Act and the applicable accounting standards. However, a company which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act. (Proviso to Rule 6)

‘Provided further that nothing in this rule shall apply in respect of preparation of consolidated financial statements by a company if it meets the following conditions:-

(i) It is a wholly owned subsidiary, or is a partially owned subsidiary of another company and all its other members, including those who are not otherwise entitled to vote, having been intimated in writing and for which proof of delivery of such intimation is available with the company, do not object to the company not presenting consolidated financial statements;

(ii) it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or outside India; and

(iii) its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in compliance with applicable Accounting Standards.’

Nothing contained in this rule shall, subject to any other law or regulation, apply for the financial year commencing from the 1st day of April, 2014 and ending on the 31st March, 2015, in case of a company which does not have a subsidiary or subsidiaries but has one or more associate companies or joint ventures or both, for the consolidation of financial statement in respect of associate companies or joint ventures or both, as the case may be.

Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1st April, 2014.

(f) The provisions applicable to the preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, also apply to the consolidated financial statements [Section 129(4)].