In continuation of series “Accounting basics for Start-ups”, today in this article, we have selected few questions frequently asked by the startups and business and trying to answer them.
Q – What are the things to be maintained in books of accounts?
Ans – Books of accounts constitute of Journal, Ledger book, Trial Balance, Original and carbon copies of bills/invoices/receipts /, Cash Book, Profit and Loss A/c, Balance Sheet and Cash Flow Statements.
Q- Is it a requirement to maintain books of accounts under the Income Tax Provisions, or Company Law Provisions or for that matter provision related to LLPs?
Ans- Companies and LLPs are required to maintain books of accounts as mandated by their governing statute, namely Companies Act, 1956 and LLP Act, 2008. Further, Income tax also casts an obligation to maintain books of accounts, irrespective of the form of business, and has separate provisions related to it. Thus, there may be a situation where a private limited company is required to comply with provisions of Companies Act and Income Tax as well.
Q- If I’m recording all my transactions (incomes, expenses, purchase, sales, etc) in an excel sheet and keeping records of bank accounts/pay slips/vouchers, am I accounting all my transactions?
Ans- Yes, you are going in the right track as you are preparing a part of Books of Accounts. But it does not cover all your transactions, so in order to keep records of all the transaction you need to maintain additional books of accounts like Journal, Ledger, Trial Balance, Cash Book, P&L A/c, Balance Sheet and Cash flow Statements in commonly accepted accounting software, such as Tally or Oracle.
Q- If I maintain accounts via a professional firm, is it mandatory for me to get accounts audited? If yes, what is the frequency of audit?
Ans- Maintaining or not maintaining books by outsourcing it to a professional firm does not determine whether you need to undergo audit or not. Furthermore, audits are of different types-internal audit, cost audit, tax audit and statutory audit. Each audit has its own statutory requirements, thresholds of being conducted with relevant deadlines and due dates.
Q- Is there any difference between accounting and accounting standards?
Ans- If accounting is the product, accounting standards are its prescription. Accounting standards are enacted and published by The Institute of Chartered Accountants of India, meant to be followed by businesses for true and fair view of their activities. All accounting standards are not mandatory for all forms of businesses. Simply put, bigger is your business, more are the accounting standards which needs to be followed.
Q-Do I have the option of not maintaining accounts if I’m incurring losses in the initial phases?
Ans- No, you don’t have that option since you need to maintain accounts mandatory whether you are incurring losses or earning profits. Not earning revenue cannot be an excuse to non-maintenance of books. Infact, as long as you are entering into transactions, you need to account for the same. The interesting thing is that if you maintain accounts in the years of losses, and file tax returns for the same, you get the benefit of setting off losses in the years of profit generation.
Q- Can I have the option of accounting my transactions manually or is it obligatory to get it done by any dedicated software?
Yes, you have an option of accounting your transaction manually. It is not at all obligatory to get it done by any dedicated software. But it’s always advisable to maintain accounts on dedicated software to eliminate any errors or miscalculations.
Q-I am a salaried individual in a MNC and a director in a family owned business. Can I account for the ‘transactions made in employee capacity by me’ and ‘for the business as a director’ in the same books of accounts?
Ans-No. An individual and a business are two completely separate legal entities. Though you may be a major stakeholder of the business, you cannot mix your own account with the accounts of the business. It has to be made very clear that once you transfer anything owned by you in the name of the business, it will from then onwards be treated as property of the business. Hence, separate accounts have to be maintained for individuals and businesses.Its a prudent practise to maintain separate bank accounts also, in order to ensure transparency and flexibility.
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