Books of Account to be kept by a Company
Every company must maintain proper books of accounts of its affairs. The following transactions must be entered in the books of accounts of the company, which must be kept at its registered office: -

a) All sums of money received and expended by the company and the matters in respect of which the respect of which the receipt and expenditure took place;

b) All sales and purchases of goods by the company; and

c) The assets and liabilities of the company.

d) In the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or other items of cost as may be prescribed relating to certain class of companies as the Central Government may require.

The books of accounts must comply with the following conditions :
1. The books must give a true and fair view of the state of affairs of the company or the branch office, if any, and explain its transaction.

2. The books must be kept on accrual basis and according to double entry system of accounting.

Every company must keep its books of account at its registered office. However, some of the books of account may be kept at such other place in India as the Board of Directors may decide, provided a notice in writing giving full address of that other place along with requisite filing fee is filed with the Registrar of Companies within seven of such decision.

If the company has a branch office, the books of account relating to transactions at the branch office may be kept at that branch office, but proper summarized reports and statements must be sent to the registered office or such other place where the books are kept, at intervals of not more than three months. The books of account of the branch must give a true and fair view of the affairs of the branch and clearly explain its transactions.

They must not conceal any transaction and also not disclose any transaction, which is fictitious. The books of accounts and other documents and records are open to inspection by any director during business hours. Similarly, they are open to inspection by the Registrar of Companies or an officer authorized by the Central Government.

These books and papers together with the vouchers pertaining to entries made must be maintained for at least 8 years. It has been clarified by the Department of Company Affairs in their Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil).

The following persons are responsible for maintaining the books of accounts of a company :
1. The managing director or manager;

2. If the company has neither a managing director nor manager, then every director of the company;

3. Every officer and other employee who has been authorized and to whom responsibility to maintain the books has been allotted by the Board of Directors.

If any of the persons referred to above fails to take all reasonable steps to maintain proper books of accounts or has by his own willful act been the cause of any default by the company in this respect, he is punishable with imprisonment up to six months or with fine which may extend to Rs.1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved that the contravention was committed by him willfully.

Preparation of Balance Sheet and Profit and Loss Account
The company has to prepare its balance sheet and profit & loss account from the books of account maintained by it. Every Balance Sheet of a company must give a true and fair view of the state of affairs of the company as at the end of the financial year and must be in the prescribed format.

If the responsible for maintaining proper books of account fails to take all reasonable steps to secure compliance by the company with the requirement of law relating to the form and contents of the balance sheet, he is liable for each offence to imprisonment for a term extending up to six months or to fine up to Rs.1,000/- or to both.

Form of Balance Sheet
Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule gives 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under:

In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information is required to be given in the horizontal format must also be given in the vertical format. Summarized prescribed vertical form of balance sheet is given below:

I. Sources of Funds

(1) Shareholders’ funds

(2) Loan funds

Total

II Application of  Funds

(1) Fixed assets
(2) Investments
(3) Current assets, loans and advances      Less: Current liabilities & provisions.
(4)	(a) Miscellaneous expenditure to the extent not written off or adjusted.
	(b) Profit & Loss Account
Total

The Central Government may, on the application or with the consent of the Board of Directors of the company, by order, modify in relation to that company, any of the requirements as to matters to be stated in the company's balance sheet or profit and loss account for adapting them to the circumstances of the company.

Contents of Profit and Loss Account
Though no format has been prescribed for the profit and loss account, Part II to Schedule VI of the Companies Act, 1956 gives a list of items, which must be disclosed in every profit & loss account. Every profit and loss account of a company must give a true and fair view of the company's profit or loss for the financial year for which it is drawn up.

Adoption of Balance Sheet and Profit & Loss Account
The Board of directors must present to the shareholders of the company, the balance sheet and a profit and loss account for the financial year at every annual general meeting. In the case of companies, which are not commercial organizations such as Section 25 companies, instead if the profit & loss account, an income & expenditure account may be prepared. The profit and loss account to be placed in the FIRST annual general meeting should relate to a period beginning with the incorporation of the company and ending with a day, the interval between which and the date of the meeting does not exceed nine months. In case of subsequent annual general meetings, the profit and loss account should relate to a period beginning with a day immediately after the period for which the preceding profit & loss account was made and ending with a day, the interval between which and the date of the meeting should not exceed six months. The financial year may be more or less than a calendar year, but it must not exceed 15 months or with the special permission of the Registrar, 18 months.

If any director fails to take all reasonable steps to comply with the aforesaid requirements he is, in respect of each offence liable to be punished with imprisonment up to six months or with fine up to Rs.1,000/- or with both.

Authentication of Balance Sheet and Profit & Loss Account
The balance sheet and profit & loss account of a company must be signed on behalf of the Board of directors by two directors out of whom one must be the managing director, where there is one and the manager, or secretary, if any. The balance sheet and profit and loss account must be approved by the Board of directors before they are submitted to the auditors for the purpose of audit. The report of the auditors must be attached to the balance sheet and profit & loss account.

The company and every officer of the company who is in default with the above provisions shall be punishable with the fine which may extend to Rs.500/-, if:

(i) Any copy of balance sheet and profit and loss account is issued, circulated or published, without being signed as required ; or

(ii) Any copy of balance sheet is issued, circulated or published, without there being annexed or attached thereto, a copy each of the following: -

(a) The profit and loss account;

(b) Any accounts, reports or statements pertaining to subsidiary companies which are required to be attached to the balance sheet,

(c) The auditors' report; and

(d) The Report of the Board of Directors

Circulation of Balance Sheet and Auditors' Report
A copy of every balance sheet, profit and loss account, auditors' report and every other document required to be annexed or attached to the balance sheet must be sent not less than twenty-one days before the general meeting to every member, to every trustee for debenture holders, and to all other persons who are entitled to have a notice of general meetings. In the case of a company not having a share capital, the above documents need not be sent to a member, or debenture holder who is not entitled to have notice of general meetings.

In case of listed companies, the company may keep the aforesaid documents available for inspection at its registered office during working hours for a period of twenty-one days before the meeting and send to every member and trustee for debenture holders only a summarized statement containing the salient features of these documents in the prescribed format.

Filing of Annual Accounts with the Registrar
Every company must file with the Registrar within 30 days from the day on which the annual accounts, auditor’s report and the director’s report were presented at the annual general meeting, three certified copies of these documents signed by the managing director, manager or secretary of the company or if there be none of these by a director of the company.

These accounts may be inspected and copies thereof may be obtained by any member of the public at the Registrar of Companies on payment of the requisite fee. However, no person other than a member of the company is entitled to inspect, or obtain copies, of the profit and loss account in the case of the following types of companies: -

1. A private company which is not a subsidiary of public company;

2. A private company whose entire paid-up capital is held only by one or more bodies corporate incorporated outside India; or

3. A private company which is deemed to be a public company by virtue of Section 43A, if the Central Government directs that it is not in the public interest that any person other than a member of the company should be entitled to inspect or obtain copies of the profit and loss account of the company.

In case the annual general meeting of a company for any year has not been held, 3 copies of the balance sheet and profit and loss account, duly signed, within thirty days from the latest day on or before which that meeting should have been held in accordance with the provisions of the Act must be filed with the Registrar of Companies. If for any reason, the annual general meeting before which a balance sheet is laid does not adopt it, or is adjourned without adopting the balance sheet or if the annual general meeting of a company for any year has not been held, a statement of the fact and reasons thereof must also be annexed to the balance sheet and to the copies thereof to be filed with the Registrar.

If default is made in complying with the above provisions, then the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs.50 for every day during the period the default continues.

Directors' Report
The report of the Board of Directors must be attached to every balance sheet presented at the annual general meeting. The report must contain information regarding the following matters: 

1. The state of affairs of the company

2. The amount, if any, which it proposes to carry to any reserves in such balance sheet

3. The amount of dividend recommended

4. Details of any material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report

5. Conservation of energy, technology absorption, foreign exchange earnings and outgo.

6. Names, designations and other particulars of all employees drawing more than Rs. 50000/- p.m. in the company

7. In case of financial year, 1998-99 and 1999-2000, the extent of Y2K compliance made by the company

8. Details necessary for a proper understanding of the state of the company's affairs and which are not, in the Board's opinion, harmful to the business of the company or of any of its subsidiaries, in respect of changes which have occurred during the financial year: -

(i) In the nature of company's business;

(ii) In the company's subsidiaries or in the nature of the business carried on by them; and

(iii) Generally in the classes of business in which the company has an interest

Auditors of Company

Auditors of Government Companies
The auditor of a Government company is appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India provided that the audit would be within the number of acceptable audits available to each auditor.

The Comptroller & Auditor General of India has the power: -
(a) To direct the manner in which the company's accounts are to be audited by the auditor so appointed and to give such auditor instructions in regard to any matter relating to the performance of his functions as such

(b) To conduct supplementary or test audit of the company's accounts by such person or persons or persons as he may authorize in this behalf; and for the purpose of such audit, to require additional information to be furnished to any person or persons so authorized, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.

The auditor must submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit.

Any such comments upon, or supplement to, the audit report must be placed before the annual general meeting of the company at the same time and in the same manner as the auditors' report.

Auditors of Other Companies
It is the duty of the auditor conduct the audit of the books of accounts of the company and to make his report to the members of the company on the accounts examined by him, and on every balance sheet, every profit and loss account and on every other document declared by the Act to be part of or annexed to the balance-sheet or profit and loss account and laid before the company in general meeting during his tenure of office. The auditor’s report, besides other things necessary in any particular case, must expressly state -

(1) Whether, in his opinion and to the best of his information and according to explanation given to him, the accounts give the information required by the Act and in the manner as required;

(2) Whether the balance-sheet gives a true and fair view of the company's affairs as at the end of the financial year and the profit and loss account gives a true and fair view of the profit or loss for the financial year;

(3) Whether he has obtained all the information and explanations required by him for the purposes of his audit;

(4) whether in his opinion, the profit & loss account and balance sheet referred to in his report comply with the accounting standards recommended by the Institute of Chartered Accountants of India;

(5) Whether, in his opinion, proper books of account as required by law have been kept by the company, and proper returns for the purposes of his audit have been received from the branches not visited by him;

(6) Whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

In case any of the above matters is answered in the negative or with a qualification, the auditor's report must state the reason for the same. Where the auditor is unable to express any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.

The Central Government is empowered to issue orders requiring the auditor to include in his report a statement on such matters as may be specified. In exercise of this power the Central Government has issued an order called "The Manufacturing and other Companies (Auditor's Report) Order, 1975. It is the duty of the auditor to comply with this order when making his report to the shareholders.

Only the person appointed as auditor of the company or where a firm of auditors is so appointed, only a partner of that the firm practicing in India, can sign the auditor's report or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

Appointment and remuneration of auditors.
Every company must, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and must, within seven days of the appointment, give intimation of the appointment to the auditor so appointed. However, before making the appointment at the annual general meeting, a written certificate must be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment, if made, will not violate the limits of maximum number of audits which an auditor is permitted to undertake.

Every auditor so appointed must within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar of Companies in writing that he has accepted or refused the appointment.

Only a person who is not in full-time employment elsewhere can be appointed as an auditor.

The maximum number of audits which one auditor can accept is 20 companies out of which not more than 10 companies must have paid-up share capital of more than Rs. 25 lakhs.

Normally, the auditor who is retiring at the annual general meeting is re-appointed for the next year at that annual general meeting. However, he may not be re-appointed under any of the following circumstances: -

(a) He is not qualified for re-appointment;

(b) He has given the company notice in writing of his unwillingness to be re-appointed;

(c) A resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed; or

(d) Where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person, the resolution cannot be proceeded with.

Where at an annual general meeting no auditors are appointed or re-appointed, the Central Government may appoint a person to fill the vacancy. The company must, within seven days of the annual general meeting in such a case, give notice of that fact to that Government, and, if a company fails to give such notice, the company, and every officer of the company who is in default, shall be punishable, with fine which may extend to five hundred rupees.

The first auditors of the company are normally appointed by the Board of directors within one month of the date of registration of the company, and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting. However, the members at any general meeting may remove such auditor and appoint another one in his place.

The Board of directors may fill any casual vacancy in the office of an auditor. However, if such vacancy is due to resignation by the auditor, the vacancy can only be filled by the company in a general meeting. Any auditor appointed in a casual vacancy holds office until the conclusion of the next annual general meeting.

Any auditor appointed can be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf.

The remuneration of the auditors of a company may be fixed either by the company at the annual general meeting of the company or it may be fixed by the Board of Directors or where the auditor has been appointed by the Central Government, by the Central Government.

Auditor not to be appointed except with the approval of the company by special resolution in certain cases.

In the case of a company in which not less than twenty-five per cent of the subscribed share capital is held, whether singly or in any combination, by --

(a) A public financial institution or a Government company or Central Government or any State Government, or

(b) Any financial or other institution established by any Provincial or State Act in which a State Government holds not less than fifty-one percent of the subscribed share capital, or

(c) A nationalized bank or an insurance company carrying on general insurance business, the appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution only.

Provisions as to resolutions for appointing or removing auditors.

Special notice is required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or for resolving that a retiring auditor shall not be re-appointed. On receipt of notice of such a resolution, the company must send a copy thereof to the retiring auditor. Where notice is given of such a resolution and the retiring auditor makes any representations in writing to the company and requests that his written representation be circulated to members of the company, the company must circulate the representation as requested, unless the representations are received by it too late for it to do so. If a copy of the representations is not sent as aforesaid because they were received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting.

However, copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other aggrieved person, the Company Law Board is satisfied that the rights conferred are being abused to secure needless publicity for defamatory matter.

Qualification and disqualification of auditors.
A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants act, 1949. A firm wherein all the partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be the auditor of a company, in which case any partner so practicing may act in the name of the firm.

However, none of the following persons can be appointed as auditor of a company: -

(a) A body corporate

(b) An officer or employee of the company

(c) A person who is a partner, or who is in the employment, of an officer or employee of the company

(d) A person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees

Audit of accounts of branch office of company

Where a company has a branch office, the accounts of that office must be audited either by the company’s auditor or by a person qualified to be appointed as auditor of the company,

Where the branch office is situated outside India, the accounts of that branch can also be audited by an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of the foreign country.

Where the accounts of any branch office are audited by a person other than the company’s audit, the company’s auditor --

(a) Shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and

(b) Shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office:

However, in the case of a banking company having a branch office outside India, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and accounts of the branch as have been transmitted to the principal office of the company in India.

Where branch accounts are to be audited by a person other than the companies auditor, the branch auditor must be appointed by the company in a general meeting or the Board of directors must be authorized to appoint the branch auditor in consultation with the company’s auditor.

The branch auditor has the same powers and duties in respect of audit of the accounts of the branch office as the company’s auditor has in respect of the same;

The branch auditor must prepare a report on the accounts of the branch office examined by him and forward the same to the company’s auditor who shall in preparing his auditor’s report, deal with the same in such manner as he considers necessary;

The branch auditor shall receive such remuneration and shall hold his appointment subject to such terms and conditions as may be fixed either by the company in general meeting or by the Board of directors if so authorized by the company in general meeting.