Books of Accounts: What the Law Requires

TL;DR

Under Section 128 of the Companies Act 2013, every company must maintain proper books of account at the registered office.

Maintaining books of accounts is mandatory for every business in India. The obligation comes from three sources: the Companies Act, 2013 (for companies), the Income-tax Act, 1961 (for all assessees), and the GST Act (for GST-registered persons). Each law has its own books requirement, its own retention period, and its own penalty for non-compliance. This post is the operational guide.

The Three Sources of the Obligation

Companies Act, 2013 — Section 128

Every company must maintain proper books of account at the registered office with respect to:

• All sums of money received and expended (and the purpose).
• All sales and purchases of goods / services.
• The assets and liabilities.
• The items of cost (for companies in production, manufacture, mining, or processing).

The books must be maintained on accrual basis and according to the double-entry system. The books must give a true and fair view of the state of affairs of the company.

The books may be maintained in electronic form, but the company must have a proper backup and the ability to print the books on demand.

The retention period is 8 years from the end of the relevant FY (Section 128(5)). For a FY 2024-25, the books must be preserved until 31 March 2033.

Income-tax Act, 1961 — Section 44AA

The Income-tax Act requires every specified person to maintain books of account. The specified persons are:

• Any person carrying on a business or profession (other than a person who opted for presumptive taxation under Section 44AD / 44ADA / 44AE and whose total income does not exceed the basic exemption limit, or who has not claimed income below the presumptive rate).
• Any person whose total income exceeds the basic exemption limit in the preceding year and who has income from other sources (interest, dividend, etc.) exceeding ₹50,000 in the previous year.

The books required:

• Cash book.
• Journal.
• Ledger.
• Stock register.
• Copies of invoices / bills issued and received.
• Any other books that may be prescribed.

The books may be maintained on cash or accrual basis, but the method must be consistently applied and must clearly reflect the income.

The retention period is 6 years from the end of the relevant AY (Section 44AA(3)). For AY 2025-26 (FY 2024-25), the books must be preserved until 31 March 2032.

For a person who has opted for presumptive taxation under Section 44AD, the books are not required — but the person must preserve the GST returns, the bank statements, and the sales / purchase register for 6 years.

GST Act — Section 35

Every GST-registered person must maintain books of account at the principal place of business (and at every additional place of business, if specified). The books required:

• Stock register (for goods).
• Account of production / manufacture.
• Account of input tax credit.
• Account of output tax.
• Account of inward and outward supplies.
• Account of taxes paid (CGST, SGST, IGST, Cess).
• Account of advances received and paid.
• Account of refund claims.

The books must be maintained in electronic form (for most registered persons, especially those above the threshold). The retention period is 6 years from the due date of filing the annual return for the relevant FY.

For a composition taxpayer, the books are simpler — purchase register, sales register, tax payment register. The retention period is the same (6 years).

The Mandatory Books for a Company

For a Pvt Ltd / public company / LLP / OPC, the mandatory books of account include:

Primary books

• Cash book — record of all cash receipts and payments (cash + bank).
• Journal — record of all non-cash transactions (credit sales, credit purchases, accruals, provisions, adjustments).
• Ledger — separate ledger for each account (asset, liability, income, expense, capital).

Subsidiary books / registers

• Sales register — record of all sales invoices issued.
• Purchase register — record of all purchase invoices received.
• Sales return register — record of credit notes issued.
• Purchase return register — record of debit notes received.
• Stock register — record of inventory movements (inward, outward, adjustments).
• Fixed asset register — record of all capital expenditure, with date, description, supplier, cost, depreciation.
• Loan register — record of all borrowings and repayments.
• Bank reconciliation statement — monthly reconciliation of bank statement with cash book.
• Petty cash book — record of small cash expenses (typically below ₹1,000).
• Payroll register — record of employee compensation, deductions, net pay.
• TDS register — record of TDS deducted and deposited, with PAN of deductees.

Statutory registers (for companies)

Under the Companies Act, every company must maintain statutory registers including:

• Register of members (Section 88).
• Register of directors and KMP (Section 170).
• Register of charges (Section 85).
• Register of contracts in which directors are interested (Section 189).
• Register of deposits (Section 73).
• Register of share transfers (Section 44).

These registers are in addition to the books of account.

The Retention Periods at a Glance

Source	Retention Period	Reference
Companies Act	8 years from end of FY	Section 128(5)
Income-tax Act	6 years from end of AY	Section 44AA(3)
GST Act	6 years from due date of annual return	Section 36
SEBI (for listed companies)	8 years	LODR Regulations
RBI (for NBFCs)	5 years	RBI Master Directions
Contract / commercial	5–7 years	Limitation Act, 1963

For most companies, the 8-year retention under the Companies Act is the longest. Preserve the books for 8 years to satisfy all the retention obligations.

The Audit Trail

For every transaction, the books must have an audit trail — the supporting documents that prove the transaction. The audit trail includes:

• Sales — invoice, receipt, e-invoice IRN, GSTR-1 declaration, GSTR-2B for the buyer.
• Purchases — invoice from supplier, receipt, payment proof, GSTR-2B reconciliation.
• Expenses — bill from vendor, payment proof, GST invoice if applicable.
• Payroll — appointment letter, salary slip, PF / ESI / PT deposit proof, TDS deposit proof.
• Bank transactions — bank statement, cheque / NEFT / RTGS confirmation.

The audit trail is preserved in the same retention period as the books.

Electronic Maintenance

The Companies Act and the Income-tax Act allow books to be maintained in electronic form. The conditions:

• The electronic record must be tamper-proof.
• The record must be accessible for the entire retention period.
• The record must be capable of being printed on demand.
• The record must have a proper backup.

For GST, electronic maintenance is mandatory for most registered persons (with turnover above the threshold). The GST portal’s GSTR-1, GSTR-3B, GSTR-2B, and the electronic cash / credit ledger are the official record.

The Common Mistakes

Mistake 1 — Books on cash basis for a company

A Pvt Ltd company is required to maintain books on accrual basis (Companies Act) and double-entry. Cash basis books are technically non-compliant. The tax auditor will require a re-statement to accrual basis for the audit report.

Mistake 2 — Single-entry bookkeeping

The Companies Act requires double-entry. A simple receipt-expense ledger is non-compliant. The full accounting cycle (journal, ledger, trial balance, P&L, balance sheet) is required.

Mistake 3 — Not maintaining statutory registers

For a Pvt Ltd, the statutory registers (members, directors, KMP, charges, etc.) are mandatory. Many small businesses ignore these. The RoC can issue a notice for non-maintenance.

Mistake 4 — Losing the books

The most common compliance failure is loss of books — paper books lost in a flood, electronic books lost when a hard drive fails, books lost when the accountant leaves. The company must reconstruct the books (which is difficult) or face a penalty.

Mistake 5 — Not preserving the audit trail

The invoices, receipts, and supporting documents must be preserved along with the books. A P&L without the underlying invoices is incomplete.

The Penalty for Non-Compliance

Income-tax Act — Section 271A

If a person fails to maintain books of account or fails to retain them for the prescribed period, the assessing officer may impose a penalty of ₹25,000 (under the older regime) or as notified under the new penalty regime.

Companies Act — Section 128(6)

If a company fails to maintain proper books, every officer of the company who is in default is liable to a fine of ₹50,000 and an additional fine of ₹500 per day for the period of continued default.

GST Act — Section 122

If a registered person fails to maintain books, the proper officer may impose a penalty of ₹10,000 or the tax amount involved, whichever is higher.

The Single Most Important Advice

Maintain the books on accrual basis, double-entry, with the full audit trail. Preserve the books for 8 years (the longest applicable period). Use accounting software (Tally Prime, Zoho Books, or QuickBooks) — the software enforces the double-entry, produces the audit trail, and backs up automatically. A disciplined monthly close (within 10–15 days of month-end) catches errors early.

When to Get Help

For a growing business, the bookkeeping function is non-trivial — invoicing, collections, payables, payroll, inventory, GST, TDS, advance tax, monthly close, quarterly review, annual audit. The finance function is typically outsourced to a CA / virtual CFO team.

We routinely handle the books and the monthly close for clients. Our bookkeeping, monthly bookkeeping, and virtual accounting services cover the full cycle. Share your current books and your monthly close process on WhatsApp for a no-charge assessment.

For the cash vs accrual choice, see our Bookkeeping basics guide. For the cash-flow forecast, see our Cash-flow forecasting guide.

Sources

• Companies Act, 2013 — Section 128, 129, 133, 134, 136
• Income-tax Act, 1961 — Section 44AA, 44AB, 271A
• CGST Act, 2017 — Section 35, 36
• ICAI — Accounting Standards and Ind AS