Any business organization including a company or an LLP should maintain proper books of accounts with respect to:
- Money received and expended
- Sales and purchase of goods and services
- Assets and liabilities
Both companies and LLPs should follow the ‘double entry’ system to maintain their respective books of accounts.
Book keeping is an essential element of doing business and involves preparing vouchers for each business transaction. Basically, vouchers are of three types –Payment, Receipt and Journal. The first tasks to be carried out after the incorporation of a company or LLP are to procure printed payment and receipt vouchers for the day-to-day recording of all business transactions.
Books of Accounts
All incorporated businesses should maintain the following main books:
- Cash Book
- Sales Book
- Purchase Book
- Vouchers and Records including all supporting documents.
The Company, LLP and Income Tax laws mandate the maintenance of proper books of accounts throughout the course of business, as well as the preparation of Balance Sheets and Profit and Loss Statements at the end of each financial year.
Book keeping for New Entrepreneurs
It is essential for every entrepreneur to have a basic knowledge and understanding of business accounting and book keeping. Typically, after incorporation, most business entities tend to focus less on day-to-day book keeping and more on profit-generating business activities. However, maintaining detailed records and books of account is not only logical, but also mandatory as per applicable laws and regulations.
Hence, every entrepreneur must know and understand the following primary accounting requirements:
- All business transactions, payments and receipts, must be recorded with appropriate supporting documentation.
- In general, business and individual/personal funds should never be mixed or used for purposes other than those designated, i.e. personal funds should not be used for business purposes and vice versa.
- Where it becomes necessary to use personal funds for business purposes, such funds should be recorded as a 'receipt' and their usage entered/explained in the appropriate books of account.
- Where business funds are used for personal purposes, they should be recorded as payment/withdrawal/loan in all relevant business records.
Book Keeping - Files and Records
Payment Vouchers File
All payments made for and in the course of business (purchase of goods and/or services, travel costs, etc.) should be recorded in separate vouchers with proof of such payments. Payment includes cash, cheque and electronic payments. If personal funds are used for business purposes, such funds should be first recorded as 'capital' or 'loan' in the company/LLP account and thereafter, its usage in a payment voucher along with necessary proof should be recorded. It is advisable to file all payment vouchers for a given year together, sorted by date and month, facilitating future validation.
Receipt Vouchers File
A record of all monies received for and in the course of business, including cash, cheque/draft, and electronic receipts. Receipts may pertain to invoices raised by the business, loans and advances from individuals/institutions, etc.
This is a register/ledger for recording cash transactions, tracking inflow and outflow over a given period of time. The book balance and cash-in-hand of a company or LLP should always match.
Businesses are required to maintain copies of all invoices raised and sent to customers for each financial year. Invoices should be referenced by serial numbers in ascending order and filed by date of creation.
Bank Statements File
All registered companies and LLPs should maintain a file containing statements of accounts pertaining to all bank transactions undertaken in a financial year (deposits, withdrawals, bank charges, interest earned, etc). If the company or LLP has accounts with more than one bank, it is advisable to maintain separate annual files for each bank.