Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Clause (a) to (c) of the
sub-section (1) of section 209 requires every company to maintain books of
accounts in respect of receipts, expenditure, sales, purchase, assets and
liabilities. It is based on the fundamentals of accounting and the broad
spectrum of preparation of mandatory final accounts by company. The clause (d)
of the sub-section (1) refers to the books of accounts in view of the cost
accounting requirements. Logically, even the company required to comply with
the cost accounting requirements, has to maintain all the books referred to in
clause (a) to (c) as there is no relaxation to any company in respect of filing
of final accounts. But, what is interesting is that, the ‘proper books of
account’ as referred to in the sub-section (1), has been further dealt with
under sub-section (3). The sub-section (3) lays down two broad conditions for
construing that the company maintains the proper books of accounts. Clause (a)
and (b) of sub-section (3) are extracted below:
(a) if there are not kept such
books as are necessary to give a true and fair view of the estate of the
affairs of the company or branch office, as the case may be, and to explain its
transactions; and
(b) if such books are not kept on
accrual basis and according to the double entry system of accounting.
The wording ‘true and fair view’
as referred to under sub-section (1) is obviously refers to the need of
recording the transactions as it took place. To conclude, there should not be
any falsity or concealment. Though, the maintenance of books of accounts by the
company can be seen as a clerical and mechanical, the preparation of final
accounts is vital. The Accounting Standards prescribed by the Institute of
Chartered Accountants of India, the provisions of the Act and other notes
issued by the Institute, governs the issue of preparation of final accounts
generally and broadly. The standards governing valuation of inventories, the
depreciation, revaluation of fixed assets, ammortazisation principles,
accounting for research and development etc. are few examples, where there was
a great potential of giving an unfair view while presenting the company’s
financial position if not checked. The provisions of the Act and in particular
the Standards prescribed by the Board, are laudable. The Standards deal with
the object of filing of accounts, basic assumptions, detailed principles and
disclosure in a systematic and appreciable way. The Standards repeatedly
stresses on the principle of conservatism and the principle that the substance
should prevail over the rules. While preparing the final accounts, the Company
is supposed to be fair in preparing estimates etc., represent before audit
fairly and adhere to the interests of the external users broadly. Thus, though,
the section refers to the ‘true and fairness’ in the context of maintaining
accounts, in fact, it has very wide spectrum. While the reference to ‘true and
fairness’ is very very wide in relation to the preparation of final accounts,
the reference to the same under the section is really narrow as it implies that
there should not be any falsity in conveying the events or transactions. Thus,
clause (a) of sub-section (3) stresses that the events and transactions to be
recorded as it occurred and without any falsity. The clause (b) of sub-section
(3) lays down a requirement of the mode in which accounts are to be maintained
rather referring to what all the books are to be maintained by the company. The
clause (b) says that the books are to be maintained on accrual basis and
according to the double entry system of account. In the accrual basis of
accounting, the events and transactions are recorded as and when they occur
without waiting for the actual receipt or payment of cash. Thus, there exist
‘cash basis system’ and the ‘accrual basis’, and in India, Act mandates to
maintain the books of accounts for the purpose of preparation of final accounts
in the ‘accrual basis’. Secondly, clause (b) of the sub-section (3) refers to
the “double entry book keeping system”. Recording both the event and
transaction separately in consonance with the principle that the expenses
equals the receipts, will be basis for the double entry book keeping system.
Usually, the prime entries, ledger accounts, trial balance, and preparation of
final accounts etc. works on the basis of “double entry book keeping system”.
Though, presenting the fair view
and the accrual basis of system, may not be ambiguous to understand, the
maintenance of books of accounts according to double entry book keeping system
is somewhat interesting to consider. Take an example, if accounting staff of
the company who maintains the accounts forgot making an entry in their books of
account though they recorded in one ledger, then, will the same be construed to
say that the company has not maintained the books of account. The answer will
be an obvious ‘No’. That’s why, the rectification entries and adjustments
became a routine business of the accountants or the auditor while preparing the
final accounts. But, if there is no mandate that the books need not be
maintained in accordance with the double entry system, then, no one bothers to
be systematic and which ultimately results in presenting an unfair view before
the users of accounts and especially shareholders. Though, it can not be ruled
out that the non-maintenance of books of accounts in accordance with the
“double entry book keeping system” can be construed as a default under the
proviso in some cases, the transaction omitted, the staff entrusted with the
job, the track record of the company, the recording of other transactions etc.
will be considered broadly while dealing with the issue of ‘default’ under the
proviso. As such, broadly, the company is supposed to maintain the following
books of account.
(a) Record of all events of
transactions which fell in any one of the heads viz., receipts, expenses,
sales, purchases, assets and liabilities in accordance with the accrual basis
of accounting and in accordance with the double entry book keeping system.
(b) All books of accounts in
compliance of the provisions of the Act and the cost accounting requirements in
respect of the scheduled or specified industry under clause (d) of sub-section
(1).
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
