India Tax and advisory, business entry and consulting services

Keeping your house In order : Financial Records to be maintained by a business

This guide to maintenance of Financial Records as per Indian regulations is tailored towards small businesses who are learning the ropes, have already obtained a measure of success but find it hard to put their informational needs together. We hope that this note will help all organize their businesses and information retrieved from such businesses in a better way. As the age old adage goes, what gets measures gets managed.

Records to be maintained by businesses can be broken up into four broad heads :

  • Income Records
  • Purchase records
  • Cash Records
  • Banking records

These sets have overlaps and intersections and therefore none of them can be ignored for peril of risking the sanctity of the other sets of information. To be able to maintain proper information it is critical that all sets be maintained correctly.

Income Records

To be able to accurately state income is important due to several reasons. Not only is it important to be able to assess the viability and strength of the business but it is also important that financial records neither overstate nor understate the incomes earned by the business. Overstating revenues subjects the business to additional tax costs whilst understatement of income can attract penalties on account of tax evasion!

Particularly important in the case of companies and LLPs where incomes are recognized on accrual basis, the business should be able to keep track of all invoices raised by it on its customers. Retail businesses shall be able to substitute this with extracts from cash registers etc. Online businesses will be able to use their order taking software and POS systems to extract and store this information.

Ordinarily invoices must contain the following information heads :

  • Name of issuing business
  • Address of business
  • Date of issue
  • Serial No
  • CIN ( company identification no) if business is being run by a company
  • Service tax, VAT registration numbers ( if applicable)
  • Description of goods, services as well as prices
  • Details of taxes levied, if any
  • Total invoice Value

Expenses/ Purchase Records

To be able to determine your business’s profitability it is important that you should record and retain details of expenses and purchases made by your business. Documents that contain such details include:

  • Invoices received
  • Credit card statements
  • Receipts/ counterfoils
  • Cheque book counterfoils
  • Cash vouchers
  • Salary information
  • Credit Documents

Collectively these will represent the sum total of monies expended by the business in the pursuit of its main activities. Retaining and filing this data shall lead to meaningful information on the expense patterns of the company which can then be used to make informed decisions by the business owners.

This data is also useful in a tax context as it will form the basis for the justification of profitability figures as reflected by the business in its returns of incomes during scrutiny proceedings undertaken by the income tax department.

Banking Records

Bank records offer great insight into the transaction undertaken by a business. To be able to correctly ascertain the financial strength of an enterprise it is necessary that the bank balances as per records be in sync with the reality. To accomplish this a business must maintain up to date records of :

  • Bank account statements along with reconciliations
  • Cheque books, with completed counterfoils
  • Cheque/ Cash Deposit Counterfoils

The aforementioned data sets allow one to determine the exact deposits and withdrawals from the bank as well as identify the nature and purpose of such withdrawals along with the identity of the person to whom such payments have been made.

Cash Records

Despite all advances in banking technology and facilities, businesses must still undertake a large number of transactions in cash. Due to the very sensitive nature of cash holdings and transactions, It is important from a business as well as reporting perspective to have a tight handle on the cash in circulation within the enterprise.

To be able to actively ascertain the exact amount of cash available, a business must maintain two principle documents :

  • Cash collection register, to record and reconcile all collections made by the business in cash, and;
  • Day books / Cash book to map the inward and outward movement of cash from the business

Retention of Books

As per the provisions of the Income tax act 1961, an entity must maintain its books of accounts for a period of at least 6 years from the end of the relevant assessment year. In layman terms, this would mean that books of accounts shall be retained for a period of 7 years from the end of the relevant financial year.

The companies act on the other hand requires that books of accounts be maintained for a period of 8 years immediately preceding the current financial year. The 2013 version of the act also allows for maintenance of such books of accounts in an electronic format.

In Conclusion

The success of a business is going to be determined by not just how effectively it is able to convert its business plans into reality but also by how accurately it is able to map its current performance with the plan. Maintenance of a proper set of books is most critical to be able to accomplish this goal.

Comments are closed.