A S BANKA ADVISORS

Key Takeaways

• Startup bookkeeping in India is not only a finance habit. Every company must keep books of account for each financial year that give a true and fair view, on the accrual basis and the double entry system.
• You may keep those books in an accounting app, including a cloud app. If you do, the books must remain accessible in India at all times, and a backup must sit on servers physically located in India, taken every day.
• For financial years starting on or after 1 April 2023, a company that uses accounting software must use software that records an audit trail of every transaction, keeps an edit log of each change with its date, and does not let the audit trail be switched off.
• Each year, when the company files its financial statements, it tells the Registrar who its accounting service provider is, where that provider is, and, for a provider outside India, who controls the books in India.
• Our view: check the audit trail and the India backup on the day you choose an accounting app, not in the week your first audit starts.

Choosing accounting software is one of the first finance decisions a founder makes, and it can feel like a product choice: which app is easiest, cheapest, or already used by your accountant. Startup bookkeeping in India also carries rules from company law about where your books live, what the software must record, and what the company tells the Registrar every year. None of them depends on the size of the company.

This guide sets out those rules in plain language: what the law asks of your books, what changes when they sit in a cloud app, the audit trail, the daily India backup, how long to keep records, who can inspect them, and a short checklist to run against your own setup.

What does company law require of startup bookkeeping in India?

Every company must prepare and keep books of account, other relevant books and papers, and financial statements for every financial year. Together they must give a true and fair view of the company’s affairs, including any branch, and explain the transactions it has entered into.

Two choices are made for you. The books must be kept on the accrual basis, which records income when it is earned and expenses when they are incurred, not when cash moves. And they must follow the double entry system, where every transaction is recorded in at least two accounts. A cash book or a spreadsheet of bank entries, on its own, meets neither test.

Where must your books be kept?

The default place is the company’s registered office. The board of directors can decide to keep all or any of the books at another place in India. When it does, the company must file a notice with the Registrar, giving the full address of that place, within seven days of the board’s decision. The notice is filed in Form AOC-5.

The law also allows the books to be kept in electronic mode, in the manner the rules set out. A startup on an accounting app is on that route, and the specific conditions below apply to it.

Can a startup keep its books in a cloud accounting app?

Yes. Books kept in electronic form are allowed, and a cloud app is one way to keep them. The rules attach conditions to any books kept electronically:

• Accessible in India, at all times. The books and papers kept electronically must remain accessible in India at all times, so that they can be used for later reference.
• Complete and unaltered. Records must be kept in the format in which they were created, sent or received, or in a format that presents that information accurately, and the information must stay complete and unaltered.
• Readable. The records must be capable of being displayed in a legible form.
• A proper system. There must be a proper system for storing, retrieving, displaying and printing the records, as the board (or the audit committee, if there is one) thinks fit, and the records must not be disposed of or made unusable unless the law permits it.

None of these conditions asks you to avoid a cloud app or a provider based abroad. They ask you to know where your books sit and to be able to produce them in India whenever they are needed.

The India backup rule: every day, on servers in India

This is the rule to check before you sign up for any app. The backup of the books of account and other books and papers kept in electronic mode, including any kept at a place outside India, must be kept in servers physically located in India, on a daily basis.

Three points follow from the wording:

• It applies to all books kept electronically, wherever the main copy sits. An app hosted outside India does not remove it, and an app hosted in India still needs the backup in place.
• The requirement is a daily backup, not a monthly export or a year-end download.
• The servers must be physically located in India. A copy on a laptop that travels with a founder is not what the rule describes.

The practical step is a short written answer from your software provider to two questions: where is our data stored, and is a daily backup kept on a server physically located in India? If the answer to the second is no, set one up and record how it runs.

What does the company tell the Registrar every year?

When the company files its financial statements each year, it must also tell the Registrar:

1. the name of the service provider;
2. the internet protocol address of the service provider;
3. the location of the service provider, wherever applicable;
4. where the books are maintained on cloud, the address provided by the service provider; and
5. where the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India.

The fifth item matters for a startup on a foreign app. Someone in India has to be named as the person in control of the books. Decide who that is before the filing season, not during it.

What is the audit trail requirement for accounting software?

For financial years starting on or after 1 April 2023, every company that uses accounting software to maintain its books must use only software that:

• records an audit trail of each and every transaction;
• creates an edit log of each change made in the books, along with the date of the change; and
• ensures that the audit trail cannot be disabled.

The rule has no size threshold in its text. It applies to “every company which uses accounting software”, so a two-person startup on an entry-level plan is inside it.

Your statutory auditor checks it too. The auditor’s report must state whether the company used accounting software with an audit trail (edit log) facility, whether that facility operated throughout the year for all transactions recorded in the software, whether the audit trail feature was tampered with, and whether the audit trail has been preserved as the record-retention requirements demand.

Three things to check in your own setup:

• Is the feature on, and can anyone switch it off? If your app carries it as a setting, confirm it is on and locked for the whole year.
• Does it cover every transaction? Entries made in a second tool, such as an invoicing or payroll app, and then imported, are part of your books too. Know how changes made there are logged.
• Did you switch apps mid-year? The logs from the old app are part of the record for that year. Export and keep them before the old subscription lapses.

How long must a startup keep its books and vouchers?

The books of account for at least the eight financial years immediately before the current one must be kept in good order, together with the vouchers for the entries in them. A company that is younger than eight years keeps all its preceding years. If an investigation into the company has been ordered, the Central Government can direct that the books be kept for longer.

For a startup, the practical point is the subscription. If your books for past years live only inside an app, you need access to them for those eight years, whether or not you still pay for that app. The audit trail sits inside the same retention question: the auditor reports on whether it has been preserved.

Who can inspect your company’s books?

Any director can inspect the books and papers kept in India, during business hours, at the registered office or the other place where they are kept. For financial information kept outside India, copies must be maintained and produced for inspection by any director, subject to prescribed conditions. Inspection of a subsidiary’s books is done only by a person the board authorises by resolution.

This right belongs to every director, including a director nominated by an investor. If a new investor joins your board after a round, your books are open to them on the same terms as to you. Clean, current books make that a routine visit rather than a hard one. Our financial due diligence checklist covers what an investor reads once they are inside.

What happens if the books are not kept as required?

The consequence falls on named people in the company. If the managing director, the whole-time director in charge of finance, the chief financial officer, or any other person the board has charged with complying, contravenes these provisions, that person is punishable with a fine of not less than Rs 50,000, which may extend to Rs 5 lakh.

In a startup with no chief financial officer, the person the board has charged with this duty is the one the provision names. It is worth recording that decision in the board minutes.

A startup bookkeeping checklist

Each item below comes from a requirement set out above:

1. Books on accrual and double entry, for every financial year, in software that supports both.
2. Where the books are kept: registered office, or another place in India by board decision with Form AOC-5 filed within seven days.
3. Audit trail on, covering every transaction, with no way to disable it, from the first entry of the year.
4. Daily backup on servers physically located in India, confirmed in writing by your provider or set up by you.
5. Service provider details ready for the annual intimation with your financial statements, including the person in control of the books in India if the provider is abroad.
6. Eight years of books and vouchers kept, with access that survives a change of app or subscription.
7. A named person responsible, decided by the board.

If your company is also crossing the tax-audit threshold this year, our guide on whether you need a tax audit covers that separate test, and the clauses to review before signing the tax audit report covers what follows.

Frequently asked questions

Does the daily India backup apply if my accounting app is hosted in India?

The rule asks for a daily backup on servers physically located in India for books kept in electronic mode, including books kept outside India. It does not exempt books already hosted in India. Ask your provider whether its arrangement includes a daily backup on servers in India, and keep its answer on file.

Does the audit trail rule apply to a small or early-stage startup?

Its text applies to every company that uses accounting software for maintaining its books of account, for financial years starting on or after 1 April 2023. It sets no size or turnover threshold.

Can my books be kept outside India?

The law allows books in electronic mode, including at a place outside India, on conditions: the books remain accessible in India at all times, a daily backup is kept on servers in India, and the company tells the Registrar each year about its service provider and, where the provider is outside India, the person in control of the books in India.

The bottom line

An accounting app is a legal record keeper as well as a tool. Before you pick one, or before your next audit, confirm four things: the books are on accrual and double entry, the audit trail is on and cannot be switched off, a daily backup lands on a server in India, and you know which provider details go to the Registrar this year. Our view: these are settings to check on the day you choose the software, because each of them is easier to set up than to reconstruct.

Setting up your company’s books, switching accounting apps, or preparing for a first audit or a diligence review? You can book a quick call with A S Banka Advisors Private Limited.

Sources: Companies Act, 2013, provisions on books of account, as amended (India Code, indiacode.gov.in). Ministry of Corporate Affairs, Companies (Accounts) Rules, 2014, and Companies (Audit and Auditors) Rules, 2014, as amended (mca.gov.in).

Disclaimer: This article is general information for founders and is not legal, tax, accounting or investment advice. It states the position as on the date of publication; confirm the current position for your company before acting.