Importance of Record Keeping for Start-Ups

Importance of Record Keeping for Start-Ups This write-up is dedicated to all the entrepreneurs who need guidance on what are the important things to do as regards rk Accounting & Taxation in the first year of their businesses. Here we are sharing with you some tips that should keep in mind in the initial years of your business. Types of Entrepreneurs: In any country of the world, you will find two types of entrepreneurs type one who has the resources at their disposal to build a huge concern and the type two who has the vision and ideas but do not own resources to start their dream project, and turn to lenders and banks for funding. Possible structure of the new business: The above mentioned entrepreneurs shall be thinking of having their business in a structured in an organized form. Therefore, either they will be thinking of making a new company or making of a new LLP both of which have their own implications. Records are to be maintained to avoid future inconveniences:- We have noticed that the entrepreneurs often have confusions in regard to maintaining original bills or challans in their initial year. They do not give importance to maintenance of proper bill records due to their ignorance of the legal trouble that is ensuing owing to the lack of it. Therefore our message to the budding entrepreneurs is that to smoothly run your business, please maintain a chronological record of all proper bills, challans, documents, etc. in the initial year which will help you in creating a new company or LLP of your business. Also, if you are not sure of the classification, just maintaining bills chronologically would be helpful to claim tax benefits in future. An entrepreneur must keep the following records to avoid future inconveniences: 1)      Pre-incorporation Expenses: This head of expenditure covers those expenses which the entrepreneur has been paid to start his business. These expenses are known as preliminary expenses and these are recorded under the head “Other Non Current Assets” in the balance sheet. You can reap the benefit of amortization if you maintain proper evidence in regard to this in the form of original bills and challans. Accounting Standard -26 issued by The Institute of Chartered Accountants of India provides writing off intangible assets over the life of the asset subject to such period being a maximum of 10 years. It is a common practice to write off these preliminary expenses in a period of five years, though there is no legal provision to this effect. A company can as well write off its preliminary expenses in the same year as it incurs. 2) Expenses after incorporation: These types of expenditure are popularly known as post-incorporation expenses, i.e expenses incurred after the incorporation i.e. legal registration of the Company/LLP as per the relevant Act. This includes expenses which are important to run the company’s on a day-to-day basis. Keeping records as evidences for the same is very important in all the cases to keep yourself away from any future harassment. These expenses are namely- (i)  Local Registration expenses: Before functioning commences, a company or LLP needs to get itself registered to various local registrars as per the law. For example, Registrars of Companies (ROC), Registration for the professional Tax, Registration for the Service Tax, etc. Keeping the evidences for the same would help you avoid future inconveniences. (ii) Salary to employees:  If an employer is paying salary to his employees then he must check whether some of their salary incomes are exceeding the maximum exemption limit as per Income Tax Act. In cases where salary income is exceeding the maximum exemption limit as stipulated in that year’s Finance Act, then the employer needs to deduct TDS for the same u/s 192 of the Income Tax Act for the same. Employer must keep TDS payment challans to avoid future inconveniences and he will provide TDS certificate to the employees whose salaries have been reduced by TDS. (iii)  Office Rent: The Company needs to file its registered office address with its local Registrar of Companies by filing Form-18. If the company has taken it’s premise on Rent/Lease, then while submitting it’s return to the ROC the company needs to give the following details- (a)    No Objection Certificate of the owner of the building (b)   Municipal Tax paid challan (c)    Ownership deed In this regard I want to mention that if you are showing your rent payment in your books of account more than quoted in the agreement then you need to produce the original bill of payment. It has been noticed in this regard that many businessmen pay security deposit money out of their own pocket to their land lords and thus they wrongly perceive that this expense is their personal expense where this expense should be shown as a current asset in the balance sheet of their company or LLP. Thus, keeping the evidences are very beneficial for you to get help in making proper books of accounts. (iv)Electricity Expenses: Electricity Bills are to be kept month wise or quarter wise as the case may be. If part of the premises is being used for residence, proportionate expense pertaining to the business can be shown as business expenses under section 37(1) of The Income Tax Act, 1961. (v) Promotional Expenses: It includes those expenses which are made for publicity of the company or LLP, bills and Challans pertaining to the same must be kept to validate its inclusion in the books of account. (vi)Introduction of books and periodicals: Books and periodicals which a company or LLP buys and which have nexus with running the business by understanding the present condition of the industry, market, political environment, etc (Physics Today, Electronics Today, The Economic Times etc) are allowable as business expenditure under section 37(1) of The Income Tax Act, 1961. It should be understood that these are also necessary to run a business. And, therefore bills and Challans associated with them should be maintained. (vii)Stationary Expenses: A company or LLP incurs stationary expenses while running its day to day business functions. If it maintains proper records of the all the expenses then it will be easier for the accountants to book the same and to get tax benefit of these expenses and the books of account will also give a true and fair view.  (viii)Website Development Expenses: Promoting business through a website is fast catching up with entrepreneurs who get to address a larger audience than through other manners. We have companies whose websites have become more famous than its owners. This is not only a smart way to reach out to a huge audience being the entire world through World Wide Web, but also a smart way to save taxes by way of tax deductible expenses that are incurred for it being purchase of a domain, hosting charges accordingly. It is important that records of such expenses be kept being bills/invoices etc to avail of the tax benefit. To Conclude: Don’t forget that while the income you earn from your business Chargeable to tax, expenses incurred in respect of earning such income are also Allowable in accordance with The Income Tax Act, 1961. So, maintain records properly and help your accountant/consultant to reap the benefits of it. We at Taxmantra have a team of dedicated and qualified Chartered Accountants and assistants who can help you structure your dream project into a Company or LLP and also help you with taxation issues after commencement. So, if you have an idea which you believe will change the world and want to commence a company or LLP, please feel free to contact us at