You might have to keep books of accounts to comply with record-keeping requirements under Section 44AA of the Income Tax Act. These accounts are official documents that establish what your business has been earning and spending during the years it’s been running. And the information that you record can be used to determine your total tax liability. Bookkeeping and accountancy requirements under the act can get a little complicated. This is because not all businesses work under the same documentation requirements. Section 44AA helps to know more about who has to keep records, what goes into those records, and how long you need to keep the records available for inspection.
Who Needs to Keep Books of Accounts?
According to Section 44AA and Rule 6F of the Income Tax Act, there is a list of professions who need to maintain books of accounts for income tax purpose:
- if their gross receipts are more than Rs. 2,50,000 in 3 preceding years for an existing profession
- if gross receipts are expected to be more than Rs. 2,50,000 in case of a newly set up profession
The list of professions include:
- Technical consultants
- Interior decorators
- Authorised representatives, such as agents and contract negotiators
- Filmmakers, a category that includes producers; editors; actors; directors; music, dance, and art directors; camera crews; singers; song and story writers; script and dialogue writers; and costume designers
These rules shall also apply to a freelancer pursuing any of these listed professions if his gross receipts are more than Rs. 2,50,000 a year.
However, law allows you to skip the accounting records requirement:
1) if the gross receipts of the Professions listed above are not more than Rs 2,50,000 in any one or more of the preceding 3 years for an existing profession
2) if the gross receipts are expected to be less than Rs 2,50,000 in case of a newly set up profession.
What Information Goes Into the Accounts?
The law requires certain types of information to be recorded in the books of accounts. The information you’re keeping varies by industry. This is because few types of businesses keep their accounts in exactly the same way. As a rule of thumb, if you aren’t sure how you should be recording your transactions, keep a daily ledger. Record every single exchange of money in the ledger itself. There’s no downside in the tax law to keeping more information than necessary. Though not having information you need can cost you in fines later on.
As an example, if you run a medical clinic, the law states your books of accounts should have daily totals for fees paid and costs incurred. Standard practice here is to use double-entry accounting. So make sure you have someone on staff who knows how to do that. You’re also expected to keep photocopied records of all bills you send out in excess of Rs 25, and the originals of bills you receive in excess of Rs 50. As a medical practitioner, you’re required to keep a journal of all pharmaceuticals and durable medical furniture you buy and sell as a way of tracking your inventory.
How Are Books of Accounts Used?
Keeping books of accounts can place a burden on small and independent companies. But the tax authority has settled on this as the most efficient way to verify income and expenses. You must keep your books on hand for a minimum of six years. This allows the government auditors can examine your transactions from firsthand sources. After the six-year term expires, you may choose to keep the books in storage. Or you can safely destroy them without incurring a penalty.
Bookkeeping and accountancy can be challenging for small businesses. Which is why QuickBooks offers easy-to-use cloud accounting software to help you track your sales. Keep your books of accounts up to date and in line with the Tax Act requirements for an easier time during tax season.