What Are Adequate Accounting Records?

What are adequate accounting records?

What does the statute intend by the need to keep adequate accounting records, that are sufficient to show and explain the company’s transactions, such that they show with reasonable accuracy the company’s financial position?

What Are Inadequate Accounting Records?

Perhaps this is suitably well explained in R v Garvey [2001] EWCA Crim 1365 at [56] and [57]:

[56] The judge directed the jury in the following terms:
“The words ‘accounting records’, those two words, ‘accounting records’ are not defined in the Act and therefore the question is posed what accounting records must be kept? It is irrelevant that those words are not defined in the Act because explanation of them is given in a case, and as you will know from what I have told you, you probably know already, English Law depends not just on what Parliament has enacted but also on the decisions of the Court. This particular decision is nearly 120 years old and has stood the test of time. It applies now just as much as it applied when the words were first spoken and the words are clear now and I will give you them. So what is meant by accounting records? The judge said (Lord Esher MR in ex parte Reed and Bowen [1886] 17 QBD 244):
‘It is not enough that there should be books with entries in them which would require a prolonged examination by a skilled accountant in order to ascertain the result of them. That is not keeping proper books. The books shall be properly kept and balanced from time to time so that at any moment the real state of the traders affairs may at once appear.’

[57] That direction seems to us, albeit based upon authority of some antiquity, to set out fully and properly the relevant ingredients of the offence, and the nature of the defence. It accords with the relevant passage in Palmers Company Law at para F.476 para 4:

“The accounting records should comprise an orderly, classified collection of information capable of timely retrieval, containing details of the company’s transactions, assets and liabilities. An unorganised collection of vouchers and documents will not suffice: whatever the physical form of the records, the information should be so organised as to enable a trial balance to be constructed. If, for example the information is held on a computer data base as a subset of a wider information, the software should be capable of retrieving the appropriate data.”
[added emphasis]

If you want to know what company records you need to keep then follow the link to this information on our site.

Section 386 Of The Companies Act 2006

(1) Every company must keep adequate accounting records.

(2) Adequate accounting records means records that are sufficient—

(a) to show and explain the company’s transactions,

(b) to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and

(c) to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).

(3) Accounting records must, in particular, contain—

(a) entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and

(b )a record of the assets and liabilities of the company.

(4) If the company’s business involves dealing in goods, the accounting records must contain—

(a) statements of stock held by the company at the end of each financial year of the company,

(b )all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and

(c) except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

(5) A parent company that has a subsidiary undertaking in relation to which the above requirements do not apply must take reasonable steps to secure that the undertaking keeps such accounting records as to enable the directors of the parent company to ensure that any accounts required to be prepared under this Part comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).