Bookkeeping and Accounting for Tax Purposes

Revenues authorities are considered major external user of financial statement and accounts of any organization, as tax is charged on the basis of income declared in the financial statements. Small organization which have low revenues do not prepare proper accounts but for tax purpose all business organization are liable to keep record of expenses , revenues/ sales, assets and liabilities.
In Pakistan, being apex regulatory authority, Federal Board of Revenue (FBR) has defined minimum required record, books of accounts and documents for various categories of business. These categories are formed on basis of business categories, i.e. sole proprietors, partnership firms and companies, and annual turnover (sales).
Income Tax Rules ,2002 lays down rules relating to maintenance of accounting record, book keeping , methods of accounting and related issues.

Time Period for which Accounting Record Must Be Kept

As per sub rule 4 of Rule 29 every taxpayer is liable to keep accounting record for six (6) year after the end of year to which it relate.

If any legal proceeding / tax case under tax law is pending before any authority or court the taxpayer shall maintain the record till final decision of the such proceedings or case

Method of Accounting
Business Individual and Partnership firms can either use cash or accrual basis of accounting. However, companies are liable to use accrual basis of accounting only.
Required Record to be Maintained – General
Every taxpayer who carry on or run an business Income shall maintain proper books of account, documents and records relating to
1. All receipts and payment that are received and expended along with the description of such receipt and payment.
2. All sales and purchases of goods and all services provided and obtained by the taxpayer;
3. All assets of the taxpayer
4. All liabilities of the taxpayer

Record for Businesses with Business Income up to Rs. 500,000

Every business whose income earning Rs.500,000 (Rupees Five Hundred Thousand ) shall also maintain following additional accounting record and documents:
1. Serially numbered and dated cash-memo/ invoice for each transaction of sale or receipt
Following information shall be mentioned on each invoice:-
a. Business name or personal name of taxpayer
b. Business address
c. National tax number or CNIC
d. Sales tax registration number, if any
e. The description quantity and value of goods sold or services provided
2. Daily record of receipts, sales, payments purchases and expenses: a single entry in respect of daily receipts, sales, purchases and different heads of expenses will suffice.
3. Purchase and expense vouchers.

Additional Record for Business with Income Exceeding Rs. 500,000

The businesses which are earning business income exceeding Rs.5000000 are recommended to keep the proper books of accounts under double entry system, although it is not mentioned in the relevant rule but the legal requirements for maintenance of record will be fulfilled in true essence when double entry accounting system is adopted.
Following additional record should be kept and maintained by the businesses :
1. Cash book and/or bank book or daily record of receipts, sales, and payments.
2. General ledger or annual summary of receipts, sales, payments, purchases and expenses under distinctive heads;
3. Vouchers of purchases and expenses and where a single transaction exceeds Rs.10.000 with the name and address of the payee
4. Where the taxpayer deals in purchase and sale of goods, quarterly inventory of stock-in-trade showing description, quantity and value.

Manufacturers (with turnover exceeding Rs.2.5 million)

1. Serially numbered and dated cash-memo/ invoice/ receipt for each transaction of sale or receipt containing the following:
a. taxpayer’s personal name or the name of his business, Address, national tax number 2 [or CNIC] and sales tax registration number, if any;
b. the description, quantity and, value of goods sold; and
c. where a single transaction exceeds Rs.10,000 with the name and address of the customer.
2. Cash book and/or bankbook.
3. Sales day book and sales ledger (where applicable)
4. Purchases day book and purchase ledger (where applicable)
5. General ledger
6. Vouchers of purchases and expenses and where a single transaction exceeds Rs.10,000 with the name and address of the payee
7. Stock register of stock-in-trade (major raw materials and finished goods) supported by gate in-ward and outward records and quarterly inventory of all items of stock-in-trade including work-in-process showing description, quantity and value.

Record To Be Maintained By Companies
All private (including single member) and Public

All companies are required to maintain the documents mentioned for businesses earning income exceeding Rs.500,000 and as per international accounting standards. Further compliance with provisions of companies Act 2017 or Companies Ordinance 1984, whichever is applicable, is also must. Under tax and company laws (Companies Ordinance 1984 / Companies Act,2017) companies are required to get audited their accounts from a qualified Cost and Management Accountant or a Chartered Accountant.
Companies with three million paid up capital of up to 3 million can appoint a cost and management accountant as auditor however companies with paid up capital exceeding 3 million are required to appoint a chartered accountant as the auditor of the company.