Accounting for Small Business India: Complete Setup and Compliance Guide (2025)

Choosing an Accounting Method: Cash vs Accrual

Cash basis accounting records income when cash is received and expenses when cash is paid. Accrual basis records income when earned and expenses when incurred — regardless of cash movement. In India, the Income Tax Act generally requires accrual accounting for businesses (except very small taxpayers using Section 44AD/44ADA). GST accounting must always be on an accrual/invoice basis — GST is due when the invoice is raised, not when payment is received.

Recommended Accounting Software for Indian Small Businesses

The best accounting software depends on your size, GST complexity, and budget.

Essential Accounts Every Business Must Maintain

Every business must maintain: (1) Books of original entry — sales register, purchase register, cash book, journal, (2) Ledger — individual account for each customer, supplier, bank, and expense category, (3) P&L Account (Income Statement) — revenues and expenses for the year, (4) Balance Sheet — assets, liabilities and capital as at year end, (5) Bank reconciliation statement — matching bank statement with cash book. These are mandatory under Section 44AA of the Income Tax Act for businesses with turnover above ₹25 lakh.

GST Accounting: What You Must Record

For GST compliance, your accounts must separately track: (1) Output tax — GST collected on sales (CGST, SGST, IGST), (2) Input tax credit — GST paid on purchases, (3) GST payable — output tax minus ITC, (4) RCM liability — GST on reverse charge purchases. Keep a separate GST liability ledger and reconcile it to GSTR-3B monthly. The difference between your GST accounts and filed returns is the audit trigger to avoid.

Month-End Closing Checklist for Small Business

Every month: (1) Reconcile bank statement with cash book, (2) Reconcile GSTR-2B with purchase ledger — claim all valid ITC, (3) Record all pending expenses (accruals), (4) Check customer outstanding balances — follow up on overdue invoices, (5) Calculate TDS deducted from vendor payments — prepare for deposit, (6) Generate P&L statement — review profitability vs previous month.

• Bank reconciliation complete
• GSTR-2B vs purchase register reconciled
• TDS deducted and payable computed
• Customer receivables reviewed
• Monthly P&L statement reviewed