Books of Account and Financial Statements

In one line

A company must keep double-entry books on an accrual basis that give a true and fair view, must present financial statements in Schedule III form complying with the notified accounting standards, and once those statements are adopted may reopen them only on the order of a court or the Tribunal, or revise them voluntarily with the Tribunal's approval.

In exam wording: under section 128(1) 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 its branches, and such books shall be kept on accrual basis and according to the double entry system of accounting; and under section 129(1) the financial statements shall give a true and fair view, comply with the accounting standards notified under section 133, and shall be in the form or forms provided for different classes of companies in Schedule III.

Why the law has this at all

The company's accounts are the only systematic account anybody outside the company gets of what it did with the money. Members vote on them, creditors lend against them, the revenue taxes on them, and the market prices the shares by them. Every other obligation in this module depends on them: the dividend rules in [Dividends] can only work if profits are ascertained honestly, and the audit provisions in [Powers and Duties of Auditors] exist to test them.

Three ideas therefore run through these sections.

A prescribed method, so that accounts are comparable and cannot be shaped by choosing a convenient basis: accrual and double entry by s.128(1), the notified accounting standards by s.129(1), and Schedule III's forms.

A single overriding standard, the true and fair view, which the Act does not define because it cannot: compliance with the standards is necessary but not sufficient, and s.129(1)'s provisos show the Act working out where the standard yields to sector legislation.

Finality, with narrow exceptions. Adopted accounts are relied on, so they may not be rewritten at will. Reopening under s.130 needs a court or Tribunal order on fraud or mismanagement; voluntary revision under s.131 needs the Tribunal's approval and is confined to three preceding financial years.

Section 128: the books

128(1): 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 offices, and explain the transactions effected both at the registered office and its branches; and such books shall be kept on accrual basis and according to the double entry system of accounting.