Quick summary
A practical guide for Indian SME owners and founders on which accounting standards apply to your business, what the compliance obligations are, and when you need a CA.
Why accounting standards matter for SMEs
Accounting standards determine how your business records transactions, values assets, recognises revenue, and presents financial statements. Getting this wrong creates problems across bank loans, investor due diligence, statutory audits, and tax assessments. Lenders and investors rely on financial statements prepared under recognised standards to make decisions. Non-standard accounts reduce your credibility and financing options.
India has three primary sets of accounting standards relevant to businesses: Indian Accounting Standards (Ind AS), Accounting Standards issued by ICAI (AS), and Micro, Small and Medium Enterprises (MSME) specific relaxations under the Companies Act.
Which accounting standards apply to your business?
The applicable framework depends on your company structure and size. Not all businesses are required to comply with the full Ind AS framework. And applying the wrong standards creates unnecessarily complex and expensive compliance.
- Listed companies and their parent/subsidiary/associates with net worth ≥ ₹250 crore: Mandatory Ind AS (Phase I and II)
- Unlisted companies with net worth ≥ ₹250 crore OR turnover ≥ ₹1,000 crore: Mandatory Ind AS
- Small and Medium companies (SMCs). Defined under Companies Act with turnover below ₹250 crore and specific criteria: ICAI Accounting Standards (AS) with SMC relaxations
- Private limited companies not meeting Ind AS thresholds: ICAI AS framework applies
- Sole proprietors, partnerships, and LLPs not required to audit: No mandatory statutory framework; standard bookkeeping practices apply
- NBFC, banking, and insurance companies: Separate RBI/IRDAI-mandated frameworks
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Get quotes from accountants near youKey accounting standards every SME should understand
You do not need to read every standard yourself. That is your CA's responsibility. But understanding the key standards that affect your business helps you ask better questions and catch errors.
- AS 1 (Disclosure of Accounting Policies): Requires you to disclose the accounting policies used in your financial statements. Depreciation method, inventory valuation, revenue recognition basis.
- AS 2 (Valuation of Inventories): How you value closing stock affects your profit and tax liability. Methods allowed: FIFO, weighted average cost. LIFO is not permitted under Indian GAAP.
- AS 9 (Revenue Recognition): When do you recognise revenue. On invoice, on delivery, on cash receipt? Particularly important for service businesses with long-term contracts.
- AS 10 (Property, Plant and Equipment): How you capitalise and depreciate fixed assets. The Companies Act 2013 specifies useful lives for major asset classes.
- AS 22 (Accounting for Taxes on Income): Deferred tax accounting. Relevant for companies with timing differences between book profit and taxable income.
- AS 28 (Impairment of Assets): If an asset's carrying value exceeds its recoverable amount, you must recognise an impairment loss. Relevant for goodwill, brand value, and significant fixed assets.
Statutory audit requirements for Indian companies
All companies incorporated under the Companies Act, 2013. Regardless of size. Must have their accounts audited by a Chartered Accountant every financial year. This is mandatory, not optional. The audit report is filed with the ROC as part of the annual compliance process.
Tax audit under Section 44AB of the Income Tax Act is additionally required for businesses with turnover above ₹1 crore (₹2 crore if claiming presumptive taxation, ₹10 crore if cash transactions are below 5% of total receipts) and for professionals with gross receipts above ₹50 lakh.
For MSME-registered businesses, there are relaxations in certain reporting requirements, but the audit obligation itself remains.
- Companies Act audit: Mandatory for all companies; appoint auditor at first AGM
- Tax audit (Section 44AB): Mandatory if business turnover >₹1 crore or professional receipts >₹50 lakh
- GST audit: GST audit requirement under GSTR-9C for taxpayers with annual aggregate turnover >₹5 crore
- Cost audit: Required for specific industries (pharmaceutical, chemicals, telecom) as notified by MCA
Common accounting mistakes SME owners make
- Mixing personal and business expenses: This is the most common error in small businesses and creates significant problems during audits and tax assessments.
- Not recording all income: Unreported income creates tax liability exposure and makes financial statements unreliable for any financing purpose.
- Improper depreciation: Using incorrect useful lives or rates creates wrong profit figures and tax liability.
- Not maintaining invoice documentation: Under GST, input tax credit can be disallowed if invoices are not properly maintained.
- Ignoring advance tax: Waiting until year-end to pay all tax results in Section 234B and 234C interest charges.
- Not reconciling TDS: Form 26AS mismatches between TDS certificates and what's in your returns trigger scrutiny notices.
Frequently asked questions
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