Company Accounts

Learning Objectives

By the end of this topic, you should be able to:

• Explain what "company accounts" means and why the law regulates them so tightly.
• Identify the core provisions of Chapter IX of the Companies Act, 2013 (Sections 128–138) that govern books of account, financial statements, and audit.
• Describe the duty to maintain proper books of account under Section 128 and where and how long they must be kept.
• Explain the "true and fair view" standard and the role of accounting standards (AS and Ind AS) under Section 133.
• State what financial statements comprise, the Schedule III format, and when consolidated financial statements are required under Section 129(3).
• Explain the Board's Report and the Directors' Responsibility Statement under Section 134.
• Outline the obligations to circulate accounts to members (Section 136) and file them with the Registrar (Section 137).
• Understand the roles of the statutory auditor, internal audit, and the National Financial Reporting Authority (NFRA).

Quick Answer

"Company accounts" is the body of law requiring a company to keep proper records of its money and to publish, each year, a set of financial statements that give a true and fair view of its financial position. In India this is governed mainly by Chapter IX of the Companies Act, 2013 (Sections 128 to 138) and the accounting standards notified under Section 133. Every company must maintain double-entry, accrual-basis books of account (Section 128); prepare a balance sheet, profit and loss account, and cash-flow statement in the Schedule III format (Section 129); have them audited (Sections 139–143); attach a Board's Report containing a Directors' Responsibility Statement (Section 134); lay them before the members at the annual general meeting; and file them with the Registrar of Companies (Section 137). The purpose throughout is accountability — shareholders, creditors, regulators, and tax authorities all rely on these accounts, so the law backs the requirements with penalties and, at the top, oversight by NFRA.

Overview

A company handles other people's money: shareholders' capital, lenders' loans, customers' advances. Because its members enjoy limited liability, the people who deal with it cannot simply look to the owners if things go wrong — they must rely on disclosure. Company accounts are that disclosure system. They convert the flow of transactions during a financial year into a standardised, audited, publicly filed statement that outsiders can trust.

The financial year for this purpose is fixed by Section 2(41) of the Companies Act, 2013: it runs from 1 April to 31 March for every company (with a narrow exception, permitted by the Tribunal, for holding or subsidiary companies of a foreign body needing a different year for consolidation abroad). This uniformity — introduced by the 2013 Act — is itself an examinable change from the older regime, where companies could choose their own accounting year.

The subject sits at the meeting point of law and accounting. The law does not itself write the accounting rules; instead Section 133 empowers the Central Government to notify accounting standards, recommended by the Institute of Chartered Accountants of India (ICAI) and now in consultation with the National Financial Reporting Authority (NFRA). Two families of standards exist: the older Accounting Standards (AS) and the converged Indian Accounting Standards (Ind AS), which larger and listed companies must follow.

Core Concepts

1. Books of Account (Section 128)

Definition: Section 128 requires every company to keep proper "books of account" and other relevant records that give a true and fair view of the state of its affairs, on a double-entry basis and the accrual method of accounting.

Explanation: The books must be kept at the registered office; a company may keep them at another place in India if the Board so decides and files a notice with the Registrar. Books may be kept in electronic form. They must be retained for at least eight financial years (or from incorporation, if the company is younger), and longer if an investigation is ordered. Where a company has branches, proper branch records and periodic summarised returns to the head office satisfy the section. Directors have a right of inspection of the books.

Example: A trading company records a credit sale in March. Under the accrual method it books the revenue in that financial year even though the customer pays in April — matching income to the period it was earned, not the period cash arrives.

Why It Matters: Failure to keep proper books exposes the managing director, the whole-time director in charge of finance, the CFO, and any other person charged by the Board, to penalties. Proper books are also the foundation on which the auditor forms an opinion — no reliable books, no clean audit.

Common Misunderstanding: Students often say books may be kept anywhere the Board likes. They may be kept away from the registered office only if the place is in India and the prescribed notice is filed; foreign storage of primary books is not permitted.

2. Financial Statements and the True and Fair View (Section 129)

Definition: Section 129 requires that financial statements give a true and fair view of the state of affairs of the company, comply with the accounting standards notified under Section 133, and be in the form set out in Schedule III to the Act.

Explanation: Under Section 2(40), "financial statement" ordinarily includes a balance sheet, a statement of profit and loss, a cash flow statement, a statement of changes in equity (where applicable), and any explanatory notes. (A One Person Company, small company, dormant company, or start-up private company need not include a cash flow statement.) "True and fair" is the master standard: even full compliance with the letter of the standards will not save accounts that mislead, and the notes must disclose enough to make the picture honest. Schedule III prescribes the vertical format and the line items so that statements of different companies can be compared.

Example: A company that has stopped receiving payments from a large debtor should make a provision for the doubtful debt. Ignoring it might tick the format boxes but would not present a true and fair view of realisable assets.

Why It Matters: "True and fair view" is the single most examined phrase in this topic. It is both the legal test and the auditor's touchstone under Section 143.

Common Misunderstanding: That "true and fair" means "accurate to the last rupee." It does not — accounts involve estimates and judgement (depreciation, provisions). The standard is faithfulness and fair presentation, not arithmetical perfection.

3. Consolidated Financial Statements (Section 129(3))

Definition: Where a company has one or more subsidiaries, associate companies, or joint ventures, Section 129(3) requires it to prepare consolidated financial statements in addition to its own (standalone) statements, and lay both before the members.

Explanation: Consolidation presents the group as if it were a single economic entity — combining the parent's and subsidiaries' assets, liabilities, income, and expenses, and eliminating intra-group transactions. A statement in the prescribed form (AOC-1) giving salient features of each subsidiary/associate must be attached. The manner of consolidation follows the applicable accounting standards.

Example: A holding company with two wholly owned subsidiaries publishes standalone accounts for itself and consolidated accounts covering all three, so a shareholder can see the true scale of the group rather than the parent shell alone.

Why It Matters: Consolidation prevents groups from hiding losses or liabilities inside subsidiaries. It is why headline "group" numbers of large Indian conglomerates differ from any single company's standalone figures.

Common Misunderstanding: That only listed companies consolidate. The duty flows from having subsidiaries, associates, or joint ventures — not from listing.

4. Accounting Standards and Depreciation (Sections 133 and Schedule II)

Definition: Section 133 empowers the Central Government to prescribe accounting standards recommended by ICAI in consultation with NFRA. Schedule II governs depreciation by prescribing useful lives of assets rather than fixed rates.

Explanation: Two regimes coexist: the Accounting Standards (Companies (Accounting Standards) Rules) and the converged Indian Accounting Standards (Ind AS) under the Companies (Indian Accounting Standards) Rules, 2015. Ind AS applies mandatorily to listed companies and to larger unlisted companies above prescribed net-worth thresholds, and to their holding, subsidiary, associate, and joint-venture companies. On depreciation, the 2013 Act shifted from the old practice of statutory minimum rates to the concept of useful life in Schedule II: a company charges depreciation so as to write off an asset's cost over the useful life indicated, and must disclose and justify any different life it adopts.

Example: Under Schedule II an item of office equipment has an indicated useful life over which its cost is depreciated; a company using a shorter life because its equipment wears out faster must disclose the technical basis for that judgement.

Why It Matters: The choice of standard and depreciation policy directly changes reported profit, and therefore dividends and tax — which is why the law standardises and requires disclosure.

Common Misunderstanding: That Schedule II still prescribes fixed depreciation rates. It prescribes useful lives; the rate is derived from the life and the method chosen (straight-line or written-down value).

5. The Board's Report and Directors' Responsibility Statement (Section 134)

Definition: Section 134 requires the financial statements to be approved by the Board and signed on its behalf before they are signed by the auditor and issued. It also requires a Board's Report to be attached, containing a Directors' Responsibility Statement.

Explanation: The Board's Report is the directors' narrative accompanying the numbers. In the Directors' Responsibility Statement the directors affirm, among other things, that: applicable accounting standards were followed; accounting policies were applied consistently and prudent judgements made so the accounts give a true and fair view; proper and sufficient care was taken to maintain adequate records and safeguard assets and prevent fraud; the accounts were prepared on a going concern basis; and (for listed companies) that adequate internal financial controls were laid down and operated effectively. The Report also covers the state of the company's affairs, dividends recommended, material changes, and other prescribed disclosures.

Example: Before the annual general meeting, the Board meets, approves the audited accounts, and adopts the Board's Report including the responsibility statement, which the authorised directors sign.

Why It Matters: This is where directorial accountability becomes concrete — directors personally attest to the integrity of the accounts, and a false statement can attract liability.

Common Misunderstanding: That the auditor is solely responsible for the accounts. Preparation and the true-and-fair-view responsibility rest with the Board; the auditor's job is to independently examine and express an opinion.

6. Audit, Circulation, and Filing (Sections 136, 137, and 139–143)

Definition: Companies must have their accounts audited by an independent auditor (appointed under Section 139), circulate the audited statements to members before the AGM (Section 136), and file them with the Registrar of Companies after adoption (Section 137).

Explanation: The statutory auditor, whose powers and duties are in Section 143, examines the accounts and reports whether they give a true and fair view and comply with the standards, and whether proper books have been kept. Under Section 136, a copy of the financial statements (including consolidated statements, auditor's report, and Board's Report) must be sent to every member, debenture-holder, and other entitled person, generally not less than twenty-one days before the annual general meeting. Under Section 137, a copy of the financial statements adopted at the AGM must be filed with the Registrar (in the prescribed form, AOC-4) generally within thirty days of the AGM; if not adopted, the unadopted statements are filed as provisional. Late or non-filing attracts continuing penalties.

Example: A company holds its AGM in September; members received the accounts more than 21 days earlier, the members adopt them, and the company files Form AOC-4 within 30 days.

Why It Matters: Circulation and filing are what make accounts public. Anyone — a prospective investor, a creditor, a journalist — can inspect a company's filed accounts at the Registry, which is the practical mechanism of corporate transparency.

Common Misunderstanding: That accounts are "adopted" by the Board. The Board approves them for issue; it is the members at the AGM who adopt them, after which they are filed.

Visual Learning

The annual accounts cycle under the Companies Act, 2013:

Key Terms

Term	Definition	Context / Related Concepts
Books of account	Records of money received/spent, sales/purchases, assets/liabilities, kept on accrual and double-entry basis	Section 128; kept at registered office, retained 8 years
Financial statement	Balance sheet, statement of profit and loss, cash flow statement, changes in equity, and notes	Section 2(40); Schedule III format
True and fair view	The master standard that accounts must honestly present the company's position and performance	Section 129; the auditor's touchstone under S.143
Accounting standards	Rules for recognition and measurement, notified by the Central Government	Section 133; AS and Ind AS
Ind AS	Indian Accounting Standards (IFRS-converged) for listed and larger companies	Companies (Indian Accounting Standards) Rules, 2015
Consolidated financial statements	Group accounts combining parent and subsidiaries/associates/JVs	Section 129(3); Form AOC-1
Schedule III	Prescribed format for the balance sheet and statement of profit and loss	Ensures comparability
Schedule II	Prescribes useful lives of assets for depreciation	Replaced fixed rates with useful-life concept
Board's Report	Directors' narrative report attached to the accounts	Section 134
Directors' Responsibility Statement	Directors' affirmation of accounting standards, prudence, going concern, controls	Section 134
Statutory auditor	Independent professional who audits and reports on the accounts	Sections 139 (appointment), 143 (powers/duties)
Internal audit	In-house/independent evaluation of controls, required for prescribed classes of companies	Section 138
NFRA	National Financial Reporting Authority; audit and standards oversight body	Section 132
Financial year	Uniform 1 April–31 March accounting period	Section 2(41)

Common Mistakes

Mistake 1

• Misconception: "Compliance with accounting standards automatically means the accounts are legally correct."
• Why it's wrong: Section 129 makes "true and fair view" the overriding test; accounts that follow the standards mechanically but still mislead do not satisfy the Act. Additional disclosure in the notes may be needed.
• Correct: Standards are the floor; the true and fair view is the ceiling. Where the two conflict, the accounts (with disclosure) must be made fair.

Mistake 2

• Misconception: "The auditor prepares the company's accounts."
• Why it's wrong: Preparation and responsibility rest with management and the Board (Section 134). The auditor independently examines them and expresses an opinion (Section 143); doing both would destroy independence.
• Correct: Board prepares and approves; auditor audits and reports; members adopt.

Mistake 3

• Misconception: "A company can choose any twelve-month accounting year it likes."
• Why it's wrong: Section 2(41) fixes the financial year as 1 April to 31 March for companies; only a narrow Tribunal-permitted exception exists for foreign-linked holding/subsidiary companies needing to consolidate abroad.
• Correct: The default and near-universal financial year is April–March.

Comparison and Connections

Feature	Standalone financial statements	Consolidated financial statements
Scope	The company alone	The company plus subsidiaries, associates, joint ventures
Trigger	Every company	Only where the company has subsidiaries/associates/JVs (S.129(3))
Purpose	Company-level accountability	True picture of the whole group
Attachment	—	Form AOC-1 with salient features of each entity

Connections: this topic depends on corporate personality (a company must account for itself because it is a separate person), reinforces the duties of directors (Section 134 turns the abstract duty of care into concrete attestation), feeds shareholders' rights (members receive and adopt the accounts and vote on dividends declared out of profits shown), and underpins winding up (the liquidation waterfall operates on the assets and liabilities these accounts record). It also links to the wider disclosure philosophy behind corporate governance and audit committees.

Practice Questions

Recall

1. What must a company's books of account satisfy under Section 128, and for how long must they be kept? Answer guidance: Kept at the registered office (or another place in India with Board decision and notice to Registrar), on accrual basis and double-entry system, giving a true and fair view; retained for at least eight financial years; may be in electronic form.

2. List the components of "financial statement" under Section 2(40). Answer guidance: Balance sheet; statement of profit and loss; cash flow statement; statement of changes in equity (where applicable); notes. Note the cash-flow exemption for OPCs, small, dormant, and start-up private companies.

3. What is the Directors' Responsibility Statement, and where is it found? Answer guidance: A statement within the Board's Report under Section 134 in which directors affirm compliance with accounting standards, consistent and prudent policies giving a true and fair view, adequate records and fraud-prevention care, going-concern basis, and (listed companies) effective internal financial controls.

Understanding

4. Explain the "true and fair view" standard and how it relates to accounting standards. Answer guidance: Section 129's overriding test; standards prescribe recognition and measurement, but where mechanical compliance would mislead, additional disclosure is required so the accounts remain fair. Standards are the means; true and fair is the end.

5. Why does the law require consolidated financial statements? Answer guidance: To show the group as a single economic entity, prevent hiding losses or liabilities in subsidiaries, and give members and creditors the real scale and health of the group; intra-group transactions are eliminated.

Application

6. A private company keeps its primary accounting records on a server located outside India and stores nothing at its registered office. Advise on compliance. Answer guidance: Non-compliant with Section 128 — books may be kept away from the registered office only at a place in India with a Board decision and notice to the Registrar; foreign storage of primary books is not permitted (access from India of electronically maintained records is separately regulated). Officers in default risk penalties.

7. A company approves its audited accounts in the Board meeting but does not send them to members until ten days before the AGM. Identify the problem. Answer guidance: Breach of Section 136 — financial statements (with auditor's and Board's reports) must generally be sent to members not less than 21 days before the AGM, unless the shorter-notice consent conditions are met.

Analysis

8. "Company accounts law converts an accounting exercise into a legal duty of accountability." Critically evaluate. Answer guidance: Discuss how Sections 128–137 chain the process from record-keeping to public filing; how the Board's attestation (S.134) and audit (S.143) create personal and professional accountability; how NFRA (S.132) adds oversight after major audit failures; balance against limits — standards involve judgement, audits can fail, and enforcement depends on the Registrar and NFRA acting. Conclude that the framework institutionalises transparency but relies on honest gatekeepers.

FAQ

Q1. Who is responsible if a company's accounts are false — the directors or the auditor? Primary responsibility for true and fair accounts rests with the Board and management under Section 134. The auditor is responsible for an independent, competent audit under Section 143; if the auditor was negligent or complicit, professional and statutory consequences follow, but that does not shift the Board's own responsibility for preparation.

Q2. What is the difference between Accounting Standards (AS) and Indian Accounting Standards (Ind AS)? Both are notified under Section 133. Ind AS are the IFRS-converged standards that apply mandatorily to listed companies and larger unlisted companies (above prescribed net-worth thresholds) and their group companies; other companies continue under the older AS. Ind AS emphasises fair-value measurement and fuller disclosure.

Q3. Do all companies have to prepare a cash flow statement? No. The general rule requires it, but One Person Companies, small companies, dormant companies, and eligible start-up private companies are exempt from including a cash flow statement.

Q4. What is NFRA and why was it created? The National Financial Reporting Authority (Section 132) is an independent oversight body for accounting and auditing standards and for monitoring the quality of audits of large and listed companies. It was set up to strengthen audit oversight following major corporate accounting failures, moving primary disciplinary oversight of such audits away from a purely self-regulatory model.

Q5. What happens if a company files its accounts late with the Registrar? Section 137 imposes penalties on the company and the officers in default, and the liability continues while the default subsists. Persistent non-filing can also be a ground for regulatory action against the company and its directors.

Quick Revision

• Governing law: Chapter IX, Companies Act, 2013 (Sections 128–138) plus accounting standards under Section 133.
• Section 128: proper books, accrual + double entry, at registered office (or elsewhere in India with notice), kept 8 years, electronic form allowed.
• Section 2(41): uniform financial year, 1 April–31 March.
• Section 129: financial statements must give a true and fair view, comply with standards, follow Schedule III format; consolidated statements required where there are subsidiaries/associates/JVs (S.129(3)).
• Section 2(40): balance sheet + P&L + cash flow + changes in equity + notes (cash flow exempt for OPC/small/dormant/start-up private).
• Section 133 + Schedule II: standards (AS and Ind AS) and depreciation by useful life, not fixed rates.
• Section 134: Board approves and signs accounts; Board's Report includes the Directors' Responsibility Statement (standards, prudence, records, going concern, internal controls).
• Section 136: circulate to members generally 21 days before the AGM; members adopt the accounts.
• Section 137: file adopted accounts with the Registrar (AOC-4) within 30 days of the AGM.
• Sections 139–143: statutory audit; Section 138: internal audit; Section 132: NFRA oversight.
• Master principle throughout: true and fair view and directorial accountability.

Related Topics

Prerequisites

• 1. Introduction to Company Law — separate legal personality is why the company must account for itself.
• 3. Duties of Directors — the duty of care that Section 134 turns into concrete attestation.

Related

• 4. Corporate Governance — audit committees, internal controls, and disclosure norms.
• 7. Shareholders' Rights — members receive, adopt, and act on the accounts (dividends).

Next

• 5. Winding Up — the assets and liabilities in the accounts drive the liquidation waterfall.
• 12. Insider Trading and Corporate Frauds — accounting fraud and the failures that shaped NFRA and audit reform.

---

Additional Resources

• Companies Act, 2013 (Ministry of Corporate Affairs): https://www.mca.gov.in/
• National Financial Reporting Authority (NFRA): https://nfra.gov.in/
• Institute of Chartered Accountants of India (ICAI): https://www.icai.org/