Accounts of Companies under Companies Act, 2013

The Companies Act, 2013 lays down a comprehensive framework for maintaining accounts, preparing financial statements, ensuring transparency, and strengthening corporate governance. The provisions relating to accounts are primarily contained in Chapter IX of the Act and are supported by various schedules and rules.

The objective behind these provisions is to ensure that companies maintain proper financial discipline, present a true and fair view of their financial position, and remain accountable to shareholders, regulators, and other stakeholders.

Books of Account (Section 128)

Every company is required to maintain proper books of account and other relevant financial records. These records form the foundation of the company’s financial reporting system and ensure accuracy and accountability.

Mode and Place of Maintenance

• Books of account and other relevant papers, along with financial statements, may be maintained in electronic mode. This reflects the modern approach towards digitisation and ease of record-keeping.
• Such records are generally required to be kept at the registered office of the company.

Inspection of Books

• Any director of the company has the right to inspect the books of account during business hours.
• Where financial information is maintained outside India, copies of such information must be made available for inspection at the registered office.

Inspection of Subsidiary Accounts

• In the case of a subsidiary, inspection is restricted and can be carried out only by a person authorised through a resolution of the Board of Directors.
• This restriction ensures that sensitive financial information is accessed in a controlled and authorised manner.

These provisions collectively ensure transparency while maintaining necessary safeguards for corporate information.

Financial Statements (Section 129)

Financial statements represent the financial health and performance of a company. The Act imposes strict requirements to ensure their reliability and accuracy.

True and Fair View

• Financial statements must provide a true and fair view of the state of affairs of the company.
• This principle is fundamental and ensures that the financial position is not misleading.

Compliance with Accounting Standards

• Financial statements must comply with the accounting standards notified under Section 133.
• The format must conform to Schedule III of the Act.

Components of Financial Statements

Financial statements include:

• Balance Sheet
• Profit and Loss Account
• Notes and annexures
• Any additional documents required under the Act

The notes and annexures are an integral part of the financial statement and provide detailed explanations and disclosures.

Approval and Presentation

• The financial statements must be approved by the Board of Directors.
• They must be laid before the Annual General Meeting (AGM) for consideration by shareholders.

Consolidated Financial Statements

• Where a company has one or more subsidiaries, it must prepare consolidated financial statements (CFS).
• These statements combine the financials of the holding company and its subsidiaries in the same format.
• A separate statement highlighting the salient features of subsidiaries must also be attached.
• Consolidated financial statements must be approved by both:
  • The Board of Directors, and
  • The shareholders
• Consolidation is required at every level of holding and subsidiary companies.

Disclosure of Deviations

• If there is any deviation from accounting standards, the company must disclose:
  • The deviation
  • The reasons for such deviation
  • The financial impact arising from it

This ensures full transparency in financial reporting.

Signing of Financial Statements

Financial statements must be signed on behalf of the Board by:

• Chairperson (if authorised), or
• Two directors (including Managing Director or CEO, if applicable), and
• Chief Financial Officer and Company Secretary, where appointed

In case of a One Person Company (OPC), a single director may sign the statements.

Depreciation (Schedule II)

Depreciation reflects the reduction in value of assets over time.

• The Act does not prescribe a fixed rate of depreciation.
• Instead, depreciation is calculated based on the useful life of assets.
• Schedule II provides the useful life of different categories of assets.

This approach ensures a more realistic and flexible method of accounting for asset value.

Reopening of Accounts (Section 130)

As a general rule, a company cannot reopen its books of account or recast its financial statements. However, exceptions exist.

Conditions for Reopening

Reopening is allowed only when ordered by a Court or Tribunal on the grounds that:

• The accounts were prepared in a fraudulent manner, or
• There was mismanagement affecting the reliability of financial statements

Procedural Safeguards

• Notice must be given to regulatory authorities such as:
  • Central Government
  • Income Tax Authorities
  • SEBI or other regulators
• Their representations must be considered before passing the order.

Finality of Revised Accounts

• Once revised or recast, the accounts are treated as final.

These provisions prevent misuse of financial records while allowing correction in exceptional cases.

Voluntary Revision of Financial Statements (Section 131)

In certain situations, directors may themselves realise that financial statements or Board’s reports do not comply with legal requirements.

Conditions for Revision

• Revision is permitted for any of the three preceding financial years.
• Prior approval of the Tribunal is mandatory.

Limitations

• Revision cannot be carried out more than once in a financial year.

Disclosure Requirements

• Detailed reasons for revision must be disclosed in the Board’s report.

Role of Authorities

• The Tribunal must notify:
  • Central Government
  • Income Tax Authorities
• Their representations must be considered.

This provision allows correction of genuine errors while preventing frequent alterations.

National Financial Reporting Authority (Section 132)

The Act establishes the National Financial Reporting Authority (NFRA) as a key regulatory body.

Functions of NFRA

• Recommend accounting and auditing standards to the Central Government
• Monitor and enforce quality of services provided by professionals
• Ensure compliance with prescribed standards

Powers

• NFRA has quasi-judicial powers to investigate and adjudicate cases of professional misconduct.
• Once NFRA initiates proceedings, no other body can continue parallel proceedings in such matters.

NFRA plays a crucial role in strengthening financial reporting and professional accountability.

Accounting Standards (Section 133)

Accounting standards ensure uniformity and comparability in financial reporting.

• The Central Government prescribes accounting standards.
• These are based on recommendations of:
  • The Institute of Chartered Accountants of India (ICAI)
  • Consultation with NFRA

This framework ensures that standards are both technically sound and practically relevant.

Board’s Report (Section 134)

The Board’s report is a comprehensive document that provides insights into the company’s operations, performance, and governance.

Key Contents of the Board’s Report

The report must include, among other things:

• Extract of the annual return
• Number of Board meetings held
• Directors’ Responsibility Statement
• Declaration by independent directors
• Policy on appointment and remuneration of directors
• Explanation of audit qualifications or remarks
• Details of loans, guarantees, and investments
• Information on related party transactions with justification
• Overview of the state of affairs of the company
• Proposed transfer to reserves
• Recommendation of dividend, if any

Additional Disclosures

The report must also contain:

• Material changes affecting financial position
• Energy conservation and technology absorption
• Risk management policy
• Corporate Social Responsibility (CSR) initiatives
• Performance evaluation of Board and committees (in specified companies)
• Ratio of directors’ remuneration to median employee remuneration (for listed companies)
• Details of subsidiaries, joint ventures, and associates
• Financial summary highlights
• Changes in business nature
• Appointment or resignation of directors and key managerial personnel
• Significant orders passed by regulators or courts

Governance and Transparency

• The Board must disclose reasons for not accepting recommendations of the audit committee, if any.
• Vigil mechanism details must also be included.

The Board’s report serves as a key communication tool between management and stakeholders.

Directors’ Responsibility Statement

This statement forms an essential part of the Board’s report and reflects the accountability of directors.

Key Declarations

The directors must state that:

• Applicable accounting standards have been followed, with explanations for deviations
• Accounting policies have been consistently applied
• Judgements and estimates are reasonable and prudent
• Adequate accounting records have been maintained
• Assets have been safeguarded and fraud prevented
• Accounts are prepared on a going concern basis

Additional Requirements

In the case of listed companies:

• Internal financial controls have been established and are effective
• Systems are in place to ensure compliance with all applicable laws

This statement reinforces director accountability and enhances trust in financial reporting.

Corporate Social Responsibility (Section 135)

CSR reflects the social obligations of companies towards society.

Applicability

CSR provisions apply to companies meeting any of the following thresholds:

• Net worth of ₹500 crore or more
• Turnover of ₹1000 crore or more
• Net profit of ₹5 crore or more

CSR Committee

• A CSR Committee must be constituted with at least three directors, including one independent director.
• Certain companies not required to appoint independent directors may form the committee without such a director.

Functions of CSR Committee

• Formulate CSR policy
• Recommend expenditure on CSR activities

CSR Spending

• Companies must spend at least 2% of average net profits of the preceding three years.
• If the amount is not spent, reasons must be disclosed in the Board’s report.

Additional Requirements

• CSR policy must be placed on the company’s website
• Preference must be given to local areas

CSR provisions integrate social responsibility into corporate governance.

Internal Audit (Section 138)

Internal audit is an important mechanism for internal control and risk management.

Applicability

The following companies must appoint an internal auditor:

• Every listed company
• Unlisted public companies meeting specified thresholds:
  • Paid-up capital of ₹50 crore or more
  • Turnover of ₹200 crore or more
  • Borrowings exceeding ₹100 crore
  • Deposits of ₹25 crore or more
• Private companies meeting specified criteria:
  • Turnover of ₹200 crore or more
  • Borrowings exceeding ₹100 crore

Appointment of Internal Auditor

• The internal auditor may be:
  • An employee, or
  • An external professional or firm

Role of Internal Audit

• Evaluate internal controls
• Ensure compliance with laws
• Identify risks and inefficiencies

Internal audit strengthens governance by ensuring continuous monitoring of financial processes.

Conclusion

The provisions relating to accounts under the Companies Act, 2013 establish a robust legal framework aimed at ensuring transparency, accountability, and reliability in corporate financial reporting. From maintaining books of account to preparing financial statements, from regulatory oversight by NFRA to disclosures in the Board’s report, each provision contributes to strengthening corporate governance.

The Act also emphasises ethical responsibility through the Directors’ Responsibility Statement, promotes social accountability through CSR provisions, and ensures internal checks through internal audit requirements. Together, these mechanisms create a comprehensive system that safeguards the interests of shareholders, regulators, and the public at large.