A practical guide to accounting for an Indian business — cash versus accrual, the books the law requires, GST and TDS record-keeping, when an audit becomes mandatory under section 63, retention periods, and the mistakes that cost the most.
Accounting for an Indian business is shaped by three different regulators wanting three different things from the same transactions. The income tax authorities want a computation of profit. GST wants an invoice trail that matches your suppliers' and customers' filings. The Companies Act wants a true and fair view presented in a prescribed format. A single well-kept set of books can satisfy all three; three sets of half-kept books satisfies none.
Cash or Accrual
The mercantile or accrual basis records income when it is earned and expenditure when it is incurred, regardless of when cash moves. The cash basis records both only when cash moves.
- Companies must use the accrual basis. The Companies Act requires it.
- Individuals and firms may use either for business income, but must apply the chosen method consistently.
- Whichever you choose, the method must be followed regularly. Switching between years invites the computation to be reworked.
- GST does not follow either — liability generally arises on the earlier of invoice or payment, so GST timing can differ from your books.
The Books to Maintain
- Cash book and bank book.
- Journal, for entries not passing through cash or bank.
- Ledger, with an account for every party and every head of income and expenditure.
- Sales and purchase registers, with invoices filed in sequence.
- Stock register, where you deal in goods.
- Fixed asset register, with date of purchase, cost, location and depreciation.
- Under GST: a tax invoice register, an input tax credit register, and records of any credit and debit notes.
- For TDS: a record of every deduction, the challan against which it was deposited, and the certificate issued.
Who Must Keep Books — Section 62
Section 62 of the Income-tax Act, 2025 requires books from anyone carrying on a specified profession. For everyone else the tests are:
- Income from business or profession exceeding ₹1,20,000, or turnover exceeding ₹10,00,000, in any one of the three years immediately preceding the tax year.
- For an individual or Hindu undivided family, the income threshold is ₹2,50,000.
- For a newly set up business, the same tests applied to the likely figures for the year.
- Also where a person declaring under the presumptive provisions claims income lower than the deemed rate.
When an Audit Becomes Mandatory — Section 63
| Situation | Threshold |
|---|---|
| Business, ordinary case | Turnover exceeding ₹1 crore |
| Business, where cash receipts and cash payments each stay within 5% of the total | Turnover exceeding ₹10 crore |
| Person declaring under the presumptive provisions of s.58(2) or s.61(2) | Section 63 does not apply — see s.63(2) |
The report must be furnished by the specified date, which section 63(5)(a) defines as one month before the return due date under section 263(1). For a 31 October return, that is 30 September.
The ten crore threshold is worth engineering towards. The jump from ₹1 crore to ₹10 crore requires that cash receipts do not exceed 5% of total receipts and cash payments do not exceed 5% of total payments. Both tests must be met. For a business near the boundary, moving the remaining cash transactions to banking channels removes the audit requirement entirely — a far larger saving than most deductions.
GST Record-Keeping
- Issue tax invoices in a continuous series, with the particulars the rules require.
- Reconcile the purchase register against the auto-populated inward statement every month. Credit not reflected there is generally not available.
- Track the time limit for claiming credit for a financial year — it expires at the earlier of a specified monthly return after the year end or the date the annual return is filed.
- Keep records for 72 months from the due date of the annual return.
- Reconcile turnover per the books to turnover per the returns annually, and keep the working.
Software
Choice matters less than consistency, but a few things are worth insisting on: it should generate GST-compliant invoices in series, produce the reports needed for return filing directly, maintain an audit trail of edits, allow a period to be locked once closed, and support multi-user access with distinct logins. Locally installed packages and cloud packages both meet these; what fails is a spreadsheet with no edit history.
The Mistakes That Cost the Most
- Not reconciling input tax credit monthly. By the time an annual reconciliation finds a supplier who never filed, the window to fix it has usually closed.
- Missing a TDS deduction. The disallowance of 30% of the expenditure is typically many times the tax that should have been deducted.
- Mixing personal and business transactions. It makes expenditure indefensible and complicates every subsequent reconciliation.
- Ignoring depreciation until the year end, so monthly results overstate profit and advance tax is misjudged.
- Leaving suspense balances open across periods.
- Keeping cash receipts high enough to lose the ₹10 crore audit threshold without ever calculating what that costs.