Start-ups have to consider accounting quite seriously as every penny matters at the initial stages of a business. Maintaining the Book of Accounts is therefore of dire importance when it comes to start-up companies. This would enable them to monitor the cash flow effectively.
A start-up is often put together by newbies or novices in business. The initial days of building up a start-up are nothing short of hard-wearing warfare. There are several challenges that greet a start-up in its early days like facing tough competition in the market, decision-making pertaining to the partners and members, gaining adequate clientele, and earning their credibility. Beyond all this, the biggest hurdle is maintaining the accounts.
Maintenance of the book of accounts is an evolving practice even across organisations that are well established, let alone start-ups. It is crucial that a business keeps an eye on the book of accounts as it enables it to be more organized and ensures uninterrupted growth. In a start-up, several things can be out of place since it is still in the developmental stage. Many entrepreneurs commit the blunder of extending chaos to their accounts. But this could turn out immensely perplexing, particularly at the time of fund-raising.
That being said, the Companies Act, 2013 directs companies to promptly maintain their book of accounts along with all the receipts, bills, and vouchers. The Act also specifies that the accounts be maintained on an accrual basis and follow the double-entry system, whether manually or electronically. The Income Tax Act, 1961 also mandates that financial records are duly kept in order.
Book of Accounts as per Companies Act, 2013
The Book of Accounts is simply a book, journal, or a ledger comprising supporting vouchers pertaining to the system of accounts of an organisation. The Book of Accounts aids the director or the owner of the company in ascertaining the income and expenditure of the company. The Book of Accounts also plays a vital role in scheduling cash flow forecasts and financial reports. The Book of Accounts is kept in order in respect of:
- Money earned and spent in matters related to the company’s daily activities
- Purchasing and selling of goods and rendering of services
- Assets and liabilities of the company
- Item of cost as prescribed under the Companies Act, 2013
The terminology ‘Books and Paper’ is inclusive but not limited to vouchers, receipts, accounts, deeds, documents, registers, and meeting minutes maintained in the company records physically or electronically.
Importance of Book of Accounts for a Start-up Company
The success of a start-up lies in the efficient management of the financial processes of the company. The business owner has to review the financial planning periodically to modify strategies as and when it is needed. For this purpose, the maintenance of the Book of Accounts becomes imperative. Effective financial planning ensures that the business gathers stable investors who stay with the organisation for decades together.
The key advantages of maintaining an impeccable financial record in the company include:
- It enables the business to weigh itself and see where it stands and assess its financial performance
- It pushes the business to examine its past decisions and plan the required strategies to be implemented in future
- It helps the business to keep track of the debts and receivables for the goods distributed or the services rendered
- The information in the Book of Accounts is used to communicate the company’s financial status to the investors, suppliers, vendors, and the public in general
- The information in the Book of Accounts is used to educate employees about the company’s opportunities and obstacles
- The Book of Accounts helps the company to formulate investment opportunities and to analyse the competitors.
The Book of Accounts is kept and maintained at the Registered Office of the company. Although this is the norm, the Board of Directors can keep the records elsewhere, perhaps even at a branch office after notifying the Registrar of Companies (RoC).
Procedure to Handle the Book of Accounts in a Start-up
Although handling the Book of Accounts is an on-going job, a start-up must keep up with the following points while setting up the business:
- Maintain a separate bank account for the company that is different from the personal account
- Keep track of the expenses regularly, including receipts, bills, invoices, daily payments. It has to be made sure that all such receipts are reflected on financial statements and tax returns
- Maintain a robust Book Keeping system for the business that is accommodative of its accounting needs. This can be accomplished by hiring an in-house Bookkeeping professional or can be outsourced
- There should be a clear understanding of the business’ tax obligations. The stipulated deadlines should be met to avoid penalties
- Exercise intelligible use of balance sheets, cash flow statements, and other documents to estimate the financial health of the business
As the business grows bigger and starts making revenue from multiple channels, the Book Keeping system becomes more complex and sophisticated. There are quite a number of intuitive accounting software applications available in the market which are start-up friendly and can be used by these newbie companies. This can be used liberally to get an up-to-date analysis of the cash flow of the business.
Maintaining of the Books of Accounts Online
The Book of Accounts can also be maintained online in electronic form by adhering to the following conditions:
- The record of accounts maintained online must be accessible in India
- The information should be kept in the form that is generated and should be complete and unaltered
- The records should legible and understandable
- A backup server should be readily available, since server crashes are prone to happen
- The RoC should be notified on an annual basis with the information of the service provider
The records can be inspected by the Board of Directors of the company. In the case of auditing the records of a subsidiary company, only a person authorised by the Board can carry out the inspection.
As per the provisions of the Companies Act, 2013, a company should maintain the Book of Accounts for 8 years preceding the current financial year. The start-up has to maintain this even after getting into the status of a well-established company. The Book of Accounts can be maintained by or under the supervision of the Managing Director, Whole Time Director, Chief Financial Officer, or any other person authorized by the Board of Directors.
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