Essential Books of Account Every Company Must Maintain

Every company, no matter how small or large, runs on numbers. Every rupee that comes in, every rupee that goes out, every asset bought and every liability taken on has to be written down somewhere, in a specific way, at a specific place. This isn’t just good accounting practice, it’s a legal requirement under the Companies Act, 2013. If you’re studying company law, understanding exactly what books of account a company must keep, where they must be kept, and how, is one of those foundational topics that keeps showing up in exams and in real corporate compliance work alike.

What counts as “books of account”? 🔗

The law doesn’t leave this term open to interpretation. Section 2(13) of the Companies Act defines books of account quite specifically. According to this definition, a company’s books of account must include records of all money received and spent by the company, along with the context of why that money moved, every sale and purchase of goods and services, and a clear record of the company’s assets and liabilities. For companies that deal in manufacturing, processing, or production, the law also expects records of the utilisation of materials, labour, and related items of cost.

So this isn’t just a cash register tally. It’s a complete financial trail. A garment manufacturer, for example, has to record raw material purchases, wages paid to workers, machinery costs, and finished goods sold, not just the final profit figure.

Why the scope matters 🔗

This broad definition exists so that anyone looking at a company’s books, whether it’s an auditor, a director, or a regulator, gets a complete and accurate financial picture, not a filtered or partial one. Vague or incomplete record-keeping defeats the entire purpose of corporate transparency.

Where must these books be kept? 🔗

Section 128(1) of the Act is clear on this: books of account must ordinarily be kept at the company’s registered office. This is the default position, and it applies to the head office as well as any branch offices the company operates, whether in India or abroad.

That said, the law does allow some flexibility. The Board of Directors can decide to keep all or part of these books at a different location within India. But this isn’t a decision a company can make quietly. Once the Board decides on an alternate location, the company is required to file a notice with the Registrar of Companies within seven days, giving the full address of that other place, using Form AOC-5.

What about branch offices? 🔗

If a company has a branch office, it’s considered compliant as long as proper summarised returns from that branch are periodically sent to the registered office, and those returns are kept along with the other books of account there. This means a company with operations spread across cities doesn’t need to physically transport every ledger to head office. It just needs a reliable system of consolidated reporting.

The accrual basis and double-entry system 🔗

Here’s where the law gets specific about accounting method, not just content. Books of account must be kept on an accrual basis and following the double-entry system of accounting.

Accrual basis means transactions are recorded when they occur, not necessarily when cash actually changes hands. If a company sells goods on credit in March but receives payment in April, the sale is recorded in March, the period in which it actually happened. This gives a far more accurate picture of a company’s financial performance over a given period than simply tracking cash inflows and outflows.

The double-entry system, meanwhile, is the backbone of formal accounting. Every transaction affects at least two accounts, one debit and one corresponding credit, keeping the accounting equation balanced at all times. This isn’t optional bookkeeping style; it’s a statutory requirement for every company registered under the Act.

Why not the cash basis? 🔗

Cash basis accounting, where you record income and expenses only when money physically moves, can make a struggling company look temporarily healthy just because cash happens to be sitting in the account, or make a profitable company look weak because payments haven’t yet arrived. Accrual accounting closes that gap, which is exactly why lawmakers made it mandatory for companies rather than leaving it as a matter of choice.

Keeping books of account in electronic form 🔗

Companies aren’t required to maintain physical ledgers and registers anymore. The Act explicitly permits maintaining books of account and related papers in electronic mode, provided certain conditions are met. This reflects how most companies actually operate today, using accounting software rather than handwritten registers.

However, electronic record-keeping comes with its own compliance conditions, not a free pass to store data however a company likes.

That audit trail requirement is a fairly significant compliance point companies have had to adapt to in recent years. It essentially makes it very difficult to quietly edit historical financial data without leaving a digital footprint, which strengthens the reliability of electronic books considerably.

Who is allowed to inspect these books? 🔗

Books of account maintained within India are open for inspection by any director during business hours. This is a meaningful right because directors are legally responsible for a company’s affairs and need access to accurate financial information to fulfil that role properly.

For a subsidiary company’s books, though, inspection is more restricted. Only a person specifically authorised by a Board resolution can inspect those records, not just any director of the holding company. And if financial information is maintained outside India, a director wanting to inspect it typically needs to make a formal request specifying the details required.

Interestingly, ordinary shareholders don’t automatically get the same inspection rights as directors. Members generally cannot walk in and demand to inspect the books of account unless specific circumstances, such as allegations of financial mismanagement, are involved, and even then it usually requires approaching the National Company Law Tribunal.

How long must companies preserve these records? 🔗

Books of account, along with the relevant vouchers, must be preserved for a minimum of eight financial years immediately preceding the relevant financial year. For a company that’s been operating for fewer than eight years, this simply means preserving records from the very beginning of its operations.

There’s an important exception worth remembering here. If an investigation has been ordered under the Act, the Central Government can direct that records be preserved for a longer period than eight years, until the investigation is resolved.

What happens if a company doesn’t comply? 🔗

Non-compliance isn’t treated lightly. If the managing director, the whole-time director in charge of finance, the Chief Financial Officer, or any other person specifically charged by the Board with this responsibility fails to comply with Section 128, that individual can be held personally liable. The penalty involves a fine ranging from fifty thousand rupees up to five lakh rupees.

This personal accountability structure is deliberate. It ensures that record-keeping obligations aren’t treated as a low-priority administrative task somewhere down the compliance checklist, but as something senior officers of the company are directly answerable for.

Putting it all together 🔗

To summarise the key obligations companies must follow under this part of company law:

• What to record: Receipts, expenditure, sales, purchases, assets, and liabilities, along with production-related costs where applicable.
• Where to keep it: The registered office by default, or another location in India that the Board decides on, with the Registrar notified within seven days.
• How to record it: On an accrual basis, using the double-entry system, whether physically or electronically.
• How long to keep it: At least eight financial years, longer if an investigation is ongoing.
• Who can inspect it: Directors, subject to certain conditions for subsidiaries and overseas records.

For anyone studying company law, this topic is a good reminder that corporate accounting isn’t just about producing a balance sheet at year end. It’s a continuous, legally mandated discipline that runs through every transaction a company makes, all year round.

What do you think? If a growing startup keeps shifting its records between city offices without informing the Registrar each time, what risks is it exposing itself to? And do you think the eight-year preservation rule is long enough given how digital records can now be stored almost indefinitely at very little cost?

References

1. https://www.mca.gov.in/content/dam/mca/pdf/CompaniesAct2013.pdf
2. https://corporate.cyrilamarchandblogs.com/2022/03/information-rights-of-a-company-director-does-our-company-law-need-a-relook-in-the-post-pandemic-world/
3. https://taxguru.in/company-law/maintenance-books-accounts-section-128-companies-act-2013.html
4. https://ca2013.com/128-books-of-account-etc-to-be-kept-by-company/
5. https://www.registerkaro.in/post/sec-128-of-companies-act-2013
6. https://enterslice.com/learning/act/companies-act-2013/section-128/