Document Sample

The article mainly focus on proper books of account i.e. accrual basis and double entry
book keeping.

Brief: Section 209 of the Companies Act provides books of account kept by the
company. The books of accounts to be kept at registered office of the company in a
proper manner. In a brief, the following details to be mentioned in the books of

   1) all sums of money received and expended by the company and the matters in
      respect to which the receipt and expenditure takes place
   2) all sales and purchases of goods of the company
   3) the assets and liabilities of the company

In case of books of accounts are kept at other than registered office of the company at
such other place in India as the board may decide the place and necessary intimation to
Registrar of Companies a notice in writing giving the full address of that other place
within seven days of decision taken in the board meeting.

Sub Section (2) provides that the company is having branch office in or outside India,
then it should also comply sub section (1) of the Companies act, 1956.

Sub section (3) provides that for the purpose of sub section (1) and (2) proper books of
account shall not be deemed to be kept to the matters specified therein

Sub clause (a) of section 3 of Section 209 provides that books are not kept as are
necessary to give true and fair view of the state of affairs of the company or branch
office as the case may be and explain its transactions.

Sub clause (b) of sub section 3 of section 209 provides that if such books are not kept
on accrual basis and according to the double entry system of recording.

In the above clause there are two point, one is accrual basis and another is double entry
system of recording. If both the methods are not followed then it will not be treated as
proper books of accounts maintained by the company as per Section 209 of the
Companies Act, 1956

Sub clause(b) of sub section 3 of section 227 of the companies act, 1956 provides that
the auditor has to state in his opinion, proper books of account as required by law have
been kept by the company so far as appears from his examination of those books, and
proper returns adequate for the purposes of his audit have been received from
branches not visited by him;
Sub clause (iii) of sub section (2AA) of Section 217 provides that the directors had taken
proper and sufficient care for the maintenance of adequate accounting records in
accordance with the provisions of this Act for safeguarding the assets of the company
and for preventing and detecting fraud and other irregularities;

From the above, Section 209, 217 and 227 emphasizing proper books of accounts to be

Accrual basis: Accruals is nothing but accumulation. Accrual basis of accounting is a
system of accounting that matches revenues and expenses, respectively, to the period
they were earned and incurred. Under accrual basis accounting, revenue is recorded
when product is shipped or services provided. Similarly, accrual basis accounting
requires expenses be recorded in the period in which the related revenues were
recognized. Accrual basis accounting differs from cash basis accounting, where revenue
and expense are recorded when Cash is received or paid. Here's an example of accrual
basis accounting: suppose a company sells and Motor pumps to a customer for Rs.10000
in year 1. The customer pays Rs.3000 in year 1 and Rs.7000 in year 2. Under accrual
basis accounting, the entire Rs.10000would be reported as revenue in year 1, even
though Rs.7000 wasn't received until year 2. Under accrual basis accounting, the
company recognizes revenue when it has substantially fulfilled its obligations to the
customer. Because accrual basis accounting requires allocating revenue and expense to
different time periods, it is subject to both error and abuse. Nevertheless, only accrual
basis accounting meets generally accepted accounting principles.

AS-1 of Accounting Standard on Disclosure of accounting policies refers in its report that
if the fundamental accounting assumptions viz going concern, consistency and accrual
are followed in financial statements, then specific disclosure is not required. If the
assumptions are not carried out, then necessary disclosure to be reported in the

Double Entry Book keeping: The double-entry bookkeeping system refers to a set of
rules to record financial information in a financial accounting system wherein every
transaction or event impacts at least two different accounts. There should be debit and
credit for each transactions

      The double entry accounting system records financial transactions in relation to
       asset, liability, income or expense related to it through accounting entries.
      Any accounting entry in double entry accounting system has two effects one of
       increasing one account and decreasing another account by equal amount
        The following example relates to double entry book keeping.

The golden rule of Double entry book keeping.

Double entry book keeping: Debit the receiver credit the giver

                          Debit what comes in and credit what goes out

                                Debit all expenses and losses and credit all   incomes
                              and profits.


Account Debit Credit

Assets       ▲        ▼

Expenses     ▲        ▼

Liabilities ▼         ▲

Equity       ▼        ▲

Revenue      ▼        ▲

Inspection of Books of accounts: As per sub section (4) of section 209 of the companies
act, the books of accounts and other books and papers shall be open to inspection by
any director during business hours.

In case the director wants to send his agents to inspect the books of accounts subject to
the condition that the agent must give an undertaking to the company that he shall not
pass on any information to any person other than the Director who has appointed him
to carry out the inspection. ( Sugrabai Alibhain vs Amtee properties Private limited )

Preservation and destruction of books of accounts: As per sub section 4A of section
209, the books of accounts of the company together with the vouchers relevant to any
entry in such books of account relating to a period not less than eight years
immediately preceeding current year

In case the incorportion of the company is less than eight years, then entire books of
accounts preceeing current year shall be preserved.

Non compliance of Section 209 of the Companies Act, 1956 : Sub section 5 of Section
209 provides that if any of the person referred in sub section 6 of section 209 fails to
take reasonable steps to secure compliance by the company with requirements of this
section or any wilful act then he will be liable for imprisonment for a term which may
extend to six months or with a fine of Rs.ten thousand rupees or both. The person
referred in sub section 6 are as follows

Where the company has managing director or manager , such managing director or
manager and all officers and employees of the company

In case the company has neither managing director or manager then every director of
the company will be referred as person referred in sub section 6 of Section 209 of the
Companies Act, 1956.

By CS. A Rengarajan, CsoC Member