Audit Trail, Retention and the Monthly Close: What Indian Law Expects from Your Books
Bookkeeping is often treated as a year-end activity. Indian law expects books to be maintained on a continuing basis. For companies it also expects the accounting software itself to meet specific requirements.
Who must maintain books
Companies must keep books of account at the registered office (or another place approved by the Board) on an accrual basis and under the double-entry system (Section 128, Companies Act, 2013). This applies whatever the size of the company.
LLPs must maintain books on a cash or accrual basis and under double entry, under the LLP Act.
Businesses and professionals under the Income-tax Act. A business must maintain books if its income or turnover exceeds the limits prescribed in the Act. Specified professionals, such as doctors, lawyers, Chartered Accountants, engineers, architects and interior decorators, must keep prescribed books once their gross receipts cross the prescribed limit. Even below the limits, books are needed to support the return and any loss claimed.
How long to keep them
| Law | Retention period |
|---|---|
| Companies Act | 8 years from the end of the financial year |
| CGST Act | 72 months from the due date of the annual return for the year |
| Income-tax Act | Generally until the time limit for reassessment has passed, and longer where proceedings are pending |
Audit trail (edit log) for companies
From 1 April 2023, every company using accounting software must use software that:
- records an audit trail of each transaction, logging every change with the date
- cannot have the audit trail disabled
- retains the audit trail for the statutory retention period
The statutory auditor must report whether the company has complied. Many companies were using older software versions, or had the edit log switched off, and this has led to qualified audit reports. If you use Tally Prime, Busy, Zoho Books or another package, confirm that the edit log feature is enabled and has not been turned off at any point in the year.
Books maintained in electronic form must also be backed up daily on servers physically located in India. The company must intimate the Registrar of the service provider's details where the books are kept on cloud.
A monthly close checklist
- Bank reconciliation for every account, including loan accounts and credit cards.
- GST reconciliation – sales register against GSTR-1, and purchase register against GSTR-2B and the Invoice Management System, before filing GSTR-3B.
- TDS – check deductions against the ledger, and deposit by the 7th.
- Receivables and payables – age them, follow up on overdue items, and flag MSME payables approaching 45 days.
- Accruals and prepaid expenses – rent, salaries, interest and annual contracts.
- Inventory – reconcile stock records with physical counts, at least quarterly.
- MIS – a one-page profit and loss account against the previous month and the budget, with a cash position.
Books closed monthly make the year-end audit faster and the tax filings more reliable. They are also what lenders ask for when you need working capital.
The information in this article reflects the law as on the date of publication and is for general guidance only.