Books of Account a Private Limited Company Must Keep
In short
Under section 128 of the Companies Act, 2013, every company must keep books of account at its registered office that give a true and fair view, on an accrual basis and under double-entry accounting. Books kept electronically must stay accessible in India at all times, be backed up daily on servers in India, and since 1 April 2023 be kept in software with an audit trail. Books and vouchers must be preserved for at least eight financial years.
Every private limited company in India, however small, has to keep proper books of account from the day it is incorporated. The rules are in section 128 of the Companies Act, 2013 and rule 3 of the Companies (Accounts) Rules, 2014. They decide what records you keep, where you keep them, in what kind of software, and for how long.
This guide sets out each requirement, with links to the text of the law, and the GST record-keeping rules that sit alongside it.
What does "books of account" mean under the Companies Act?
Books of account are the records of a company's money, trade and assets. Section 2(13) of the Companies Act, 2013 says they include records maintained in respect of:
- all sums of money received and spent by the company, and the matters to which the receipts and spending relate;
- all sales and purchases of goods and services by the company;
- the assets and liabilities of the company; and
- the items of cost prescribed under section 148, for companies in the classes that must keep cost records.
In practice this means a cash book and bank book, a journal, a general ledger with party ledgers for customers and suppliers, sales and purchase records, a fixed asset register and stock records. Section 128 also covers "other relevant books and papers", which include the invoices, bills, vouchers, agreements and bank statements that support each entry.
What does section 128 of the Companies Act require?
Section 128(1) requires every company to prepare and keep, for every financial year, books of account, other relevant books and papers and financial statements that give a true and fair view of the state of affairs of the company, including its branches. The books must explain the transactions at the registered office and at every branch.
| Requirement | What the law says | Source |
|---|---|---|
| Who | Every company: private, public, OPC and Section 8 | Section 128(1) |
| What | Books of account, other relevant books and papers, and financial statements for every financial year | Section 128(1) |
| Standard | Must give a true and fair view of the company's affairs, including branches | Section 128(1) |
| Basis | Accrual basis and double-entry system | Section 128(1) |
| Where | Registered office, or another place in India decided by the Board | Section 128(1) |
| Electronic books | Allowed, in the manner set out in rule 3 of the Companies (Accounts) Rules, 2014 | Section 128(1) |
| Inspection | Open to any director during business hours | Section 128(3) |
| How long | At least eight financial years, with vouchers | Section 128(5) |
Can a company keep its books on a cash basis?
No. Section 128(1) says a company's books "shall be kept on accrual basis and according to the double entry system of accounting". A company records income when it is earned and expenses when they are incurred, not when cash moves, so unpaid customer invoices, unpaid supplier bills, salaries due and other accruals must appear in the books. A record that only tracks bank receipts and payments is not enough for a company, even a newly formed one with few transactions.
Where must the books of account be kept?
At the registered office, unless the Board decides otherwise. The first proviso to section 128(1) lets the Board of Directors decide to keep all or any of the books at another place in India. When it does, the company must file a notice with the Registrar of Companies within seven days of the decision, giving the full address of that place.
Branches can keep their own books. Under section 128(2), a company with a branch in India or abroad complies if the branch keeps proper books for its transactions and sends proper summarised returns to the registered office periodically. For books kept outside India, rule 4 of the Companies (Accounts) Rules, 2014 requires those summarised returns to be sent to the registered office every quarter.
Can a company keep its books in accounting software or on the cloud?
Yes. The second proviso to section 128(1) allows books to be kept in electronic mode, and rule 3 of the Companies (Accounts) Rules, 2014 sets the conditions:
| Condition | Rule 3 |
|---|---|
| The electronic books must remain accessible in India, at all times, so they can be used for later reference | Sub-rule (1) |
| Records must be kept in the format in which they were originally generated, sent or received (or one that presents that information accurately), and remain complete and unaltered | Sub-rule (2) |
| Information received from branches must not be altered | Sub-rule (3) |
| Records must be capable of being displayed in a legible form | Sub-rule (4) |
| There must be a proper system for storing, retrieving, displaying or printing the records, and they must not be disposed of unless the law permits | Sub-rule (5) |
| A backup of the electronic books, including any kept outside India, must be kept on servers physically located in India on a daily basis | Proviso to sub-rule (5) |
| The company tells the Registrar each year, when it files its financial statements, the name, IP address and location of its service provider, the cloud address where books are on the cloud, and, for a service provider outside India, the name and address of the person in control of the books in India | Sub-rule (6) |
The words "at all times" and "daily basis" were added by the Companies (Accounts) Fourth Amendment Rules, 2022, with effect from 5 August 2022. Before that, the rule asked for books to be accessible in India and backed up periodically.
What is the audit trail requirement for company accounting software?
From the financial year starting on or after 1 April 2023, a company that uses accounting software for its books must use only software that records an audit trail of each and every transaction. Under the proviso to rule 3(1), the software must create an edit log of each change made in the books along with the date of the change, and the audit trail must not be capable of being disabled.
The statutory auditor checks this. Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 requires the audit report to state whether the company used software with an audit trail (edit log) facility, whether it operated throughout the year for all transactions, whether it was tampered with, and whether the audit trail was preserved as the record retention rules require. A company using spreadsheets, or software with the edit log switched off, can expect this to be reported.
How long must a company keep its books of account?
At least eight financial years. Section 128(5) requires the books of account for not less than the eight financial years immediately before a financial year, together with the vouchers relevant to each entry, to be kept in good order. A company that has existed for less than eight years keeps all its years.
| Situation | How long to keep the books | Source |
|---|---|---|
| Normal case | Eight financial years before the current year, with vouchers | Section 128(5) |
| Company less than eight years old | Every year since incorporation | Section 128(5) |
| Investigation ordered under Chapter XIV | Longer period, if the Central Government directs | Proviso to section 128(5) |
| GST records of a registered company | 72 months from the due date of the annual return for the year | CGST Act, section 36 |
| GST records under appeal, proceeding or investigation | One year after it is finally disposed of, or 72 months, whichever is later | Proviso to section 36 |
Because the periods are counted differently, keep each year's records until the longest applicable period has run out.
Who can inspect a company's books?
Any director of the company, during business hours. Section 128(3) makes the books kept in India open for inspection at the registered office or the other place where they are kept, and section 128(4) requires officers and employees to give the director reasonable help. For financial information kept outside India, rule 4 lets a director make a written request and the company must produce the information within 15 days. The director must ask in person, not through an agent or power of attorney holder.
The statutory auditor also has a right of access at all times to the books and vouchers, wherever they are kept, under section 143(1).
Can a company change its books after the accounts are finalised?
Only in narrow cases. Section 130 says a company shall not re-open its books of account or recast its financial statements unless the Central Government, the income-tax authorities, SEBI, another regulator or any person concerned applies, and a court or the Tribunal orders that the earlier accounts were prepared in a fraudulent manner or that the company's affairs were mismanaged, casting doubt on the reliability of the financial statements. This is one reason the audit trail matters: changes to closed periods should be visible, not silent.
What is the penalty for not keeping proper books?
The penalty falls on the people responsible. Under section 128(6), if the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with complying with section 128 contravenes it, they are punishable with a fine of not less than ₹50,000, which may extend to ₹5 lakh.
| Before 21 December 2020 | From 21 December 2020 |
|---|---|
| Imprisonment up to one year, or fine of ₹50,000 to ₹5 lakh, or both | Fine of ₹50,000 to ₹5 lakh |
The Companies (Amendment) Act, 2020 removed the option of imprisonment with effect from 21 December 2020. Poor books also cause indirect damage: a qualified audit report, delayed annual filings in AOC-4 and MGT-7 or MGT-7A, and trouble supporting tax and GST returns.
What records does GST law require on top of this?
A GST-registered company must also keep accounts at its principal place of business shown on the registration certificate. Section 35(1) of the CGST Act, 2017 requires a true and correct account of:
- production or manufacture of goods;
- inward and outward supplies of goods or services;
- stock of goods;
- input tax credit availed;
- output tax payable and paid; and
- other particulars that are prescribed.
Where the registration lists more than one place of business, accounts for each place are kept there, and they may be kept electronically. If the company's ledgers are set up to capture these details, one set of books serves both laws, and the same records feed the GSTR-9 annual return. Income-tax law has its own record-keeping and tax audit rules, and the company's books are the starting point for its income tax return.
What should a new private limited company do from day one?
A short checklist for founders:
- Choose software with an audit trail that cannot be disabled, and keep it switched on.
- Record on accrual: raise invoices in the books when issued, and book supplier bills, salaries and other expenses when incurred.
- Keep the vouchers behind every entry, in an orderly digital or paper file.
- Check the backup: if the software or its servers are outside India, make sure a daily backup sits on servers in India, and note the provider's details for the annual filing.
- Pass a Board resolution and notify the Registrar within seven days if the books are to be kept anywhere other than the registered office.
- Close each month: reconcile bank, GST and TDS balances so the year-end audit is not a reconstruction exercise.
- Plan retention for at least eight financial years, and longer where GST or an investigation requires it.
These sit alongside the other first-year duties in our compliance checklist for a new private limited company. KNAP Advisory maintains books for private limited companies to these standards through our accounting and bookkeeping service, and prepares the year-end filings through ROC annual filing.
Frequently asked questions
What are the books of accounts for a private limited company?
They are the records of all money received and spent, all sales and purchases of goods and services, and the company's assets and liabilities, as defined in section 2(13) of the Companies Act, 2013. In practice that means a cash and bank book, journal, general ledger, sales and purchase records, fixed asset and stock records, plus the supporting vouchers and invoices.
Which section of the Companies Act deals with books of account?
Section 128 of the Companies Act, 2013. It requires every company to keep books of account and financial statements that give a true and fair view, on an accrual basis under double entry, at the registered office, for at least eight financial years. The manner of keeping books electronically is in rule 3 of the Companies (Accounts) Rules, 2014.
Is it mandatory for a private limited company to maintain books of account?
Yes. Section 128 applies to every company, so a private limited company must keep books from incorporation, even if it has no revenue yet. There is no turnover threshold for this duty under company law. A dormant or very small company still needs books that support its financial statements and its annual filings with the Registrar.
What is the double-entry system of accounting?
It is the method in which every transaction is recorded in at least two accounts, as a debit in one and an equal credit in another, so the books always balance. Section 128(1) of the Companies Act requires companies to follow it. It lets the company prepare a trial balance, a balance sheet and a profit and loss statement from the same records.
What is the difference between accrual basis and cash basis accounting?
On an accrual basis, income is recorded when it is earned and expenses when they are incurred, whatever the date of payment. On a cash basis, only actual receipts and payments are recorded. Companies must use the accrual basis under section 128(1) of the Companies Act, so unpaid invoices, outstanding bills and expenses due must appear in the books.
Can a company keep its books of account at a place other than the registered office?
Yes, at another place in India, if the Board of Directors decides so. The company must then file a notice with the Registrar within seven days of the Board's decision, giving the full address of that place. Books of a branch may be kept at the branch, provided it sends proper summarised returns to the registered office.
Is Tally or Zoho Books acceptable for statutory books of account?
Any accounting software can be used, provided it meets rule 3 of the Companies (Accounts) Rules, 2014. From the financial year starting 1 April 2023, it must record an audit trail of every transaction, keep an edit log of each change with its date, and not allow the audit trail to be disabled. The books must also stay accessible in India, with a daily backup on servers in India.
Can a company's accounting data be stored on servers outside India?
It can, but the books must remain accessible in India at all times, and a backup must be kept on servers physically located in India on a daily basis under rule 3(5). Each year, with its financial statements, the company tells the Registrar the service provider's name, IP address and location, and for a provider abroad, the person in control of the books in India.
What is an edit log in accounting software?
An edit log is the software's record of each change made to an entry in the books, including the date of the change. Rule 3(1) of the Companies (Accounts) Rules, 2014 requires companies to use software that creates such a log for each and every transaction and cannot be switched off. It shows who changed what, and when, after an entry was first recorded.
Can a company use Excel to maintain its books of account?
Excel alone is unlikely to meet the rules. Since 1 April 2023, a company that uses accounting software must use software with a non-disableable audit trail of each transaction and an edit log of changes, and the auditor must report on it under rule 11(g). Spreadsheets do not keep such a log, so most companies use dedicated accounting software instead.
Who is responsible for maintaining a company's books of account?
Section 128(6) places the responsibility on the managing director, the whole-time director in charge of finance, the Chief Financial Officer, or any other person the Board has charged with complying with the section. In a small private company without these posts, the Board should formally assign the duty, because the person charged is the one exposed to the penalty.
Can directors ask to see the company's books?
Yes. Section 128(3) lets any director inspect the books kept in India during business hours, at the registered office or wherever they are kept, and staff must give reasonable help. For financial information kept outside India, the director makes a written request and the company must produce it within 15 days. The request must come from the director personally.
Can the books of account of a company be re-opened?
Only by order of a court or the Tribunal. Under section 130 of the Companies Act, 2013, the Central Government, the income-tax authorities, SEBI, another regulator or a person concerned must apply, and the order must find that the earlier accounts were prepared fraudulently or that mismanagement casts doubt on their reliability. A company cannot simply re-open closed books itself.
What vouchers should a company keep with its books?
Section 128(5) requires the vouchers relevant to every entry to be kept in good order with the books. These include sales invoices, supplier bills, expense receipts, payroll records, bank statements, debit and credit notes, and agreements behind major entries. Scanned copies are fine if they are kept complete, legible and unaltered as rule 3 requires.
How long should a private limited company keep invoices and vouchers?
At least eight financial years under section 128(5) of the Companies Act, along with the books they support. If the company is registered under GST, its GST records must also be kept for 72 months from the due date of the annual return for the year, or longer if an appeal or investigation is pending, so keep each year until the longest period ends.
Do cost records count as books of account?
Yes, for companies in the classes that section 148 of the Companies Act covers. Section 2(13) includes in books of account the items of cost prescribed under section 148 for such companies. Most small private companies are outside those classes, so their books are the usual financial records, but a company in a covered industry must keep cost records as well.
