Accounting system to be followed by lo/bo/po

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Querist : Anonymous

Querist : Anonymous (Querist)

10 July 2015 Whether books of accounts of LO/BO/PO is to be maintained on accrual basis of accounting or cash basis of accounting? This query arises because there is no mention of this in section.

Kindly revert. Thanks in advance!

Querist : Anonymous

Querist : Anonymous (Querist)

14 July 2015 Kindly revert. Thanks in advance!

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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14 July 2024 In India, there are specific provisions under the Companies Act, 2013 and related rules that prescribe the accounting standards and principles to be followed by companies, including foreign companies operating as Liaison Offices (LO), Branch Offices (BO), or Project Offices (PO) in India. Here’s a clarification on whether these offices should maintain their books of accounts on an accrual basis or cash basis:

### Accrual Basis vs. Cash Basis:

1. **Accrual Basis of Accounting:**
- Accrual basis accounting records transactions at the time they occur, regardless of when the cash flows actually happen.
- Revenue and expenses are recognized when they are earned or incurred, irrespective of when the cash is received or paid.
- This method provides a more accurate representation of a company's financial position and performance over a period.

2. **Cash Basis of Accounting:**
- Cash basis accounting records transactions only when cash is exchanged.
- Revenue is recognized when cash is received, and expenses are recognized when cash is paid.
- It does not reflect accounts receivable or accounts payable, and it may not provide a true picture of financial performance over a period.

### Applicability to LO/BO/PO:

- **Regulatory Framework:** While there may not be specific mention of accrual basis or cash basis for LO/BO/PO in the Companies Act or related regulations, it is generally expected that these offices should follow accrual basis accounting.

- **Reasoning:** Accrual basis accounting is widely accepted globally as it provides a more accurate depiction of financial transactions and performance. It enables these offices to appropriately reflect revenue earned, expenses incurred, assets acquired, and liabilities accrued during their operations in India.

- **Consistency and Standards:** Many multinational companies and regulatory bodies require subsidiaries, branches, or project offices to maintain their books on accrual basis to align with international accounting standards and facilitate consistency in financial reporting.

### Conclusion:

While there may not be an explicit statutory requirement mandating accrual basis accounting for LO/BO/PO in India, it is strongly recommended and widely practiced for several reasons:
- To ensure compliance with international accounting norms and to provide accurate financial reporting.
- To facilitate transparency and accountability in financial operations.
- To align with best practices followed by multinational companies.

Therefore, unless there are specific exemptions or alternative guidelines provided by regulatory authorities, maintaining books of accounts on accrual basis is considered appropriate and advisable for Liaison Offices, Branch Offices, and Project Offices operating in India. It is advisable to consult with a professional accountant or financial advisor familiar with Indian regulations for specific guidance tailored to your company's operations and compliance requirements.

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