Bookkeeping basics for Sri Lankan small businesses

Last verified against the primary sources on 15 October 2026.

A tax deadline lands. A bank asks for accounts. A cash shortfall forces the question. At that point, the business owner opens the books and discovers that months of transactions have never been recorded. Or were recorded wrong.

Good bookkeeping gives you a current picture of what the business owns, owes, earns, and spends. It also gives you the evidence base that accounting and bookkeeping support, tax filings, lenders, and statutory audits require.

What bookkeeping is. And how it differs from accounting

Bookkeeping is the systematic recording of every financial transaction as it happens. Every sale, every payment, every payroll run, every bank transfer is captured in a structured record.

Accounting takes those records and interprets them. Preparing financial statements under Sri Lanka Accounting Standards (SLFRS/LKAS) [1], computing taxable income, producing analysis for decisions, and communicating results to management, banks, and regulators.

Bookkeeping is the input to accounting. Without accurate, complete bookkeeping, the accounting output is unreliable. And in a statutory audit or tax assessment, unreliable records tend to be reconstructed at the taxpayer's expense, not the auditor's.

The difference matters practically: a business owner who keeps orderly books can produce their accounts quickly and cheaply. One who does not will spend far more when a bank, a tax authority, or an auditor asks for the same information under deadline pressure.

Take a hypothetical Colombo trading company whose owner runs business and personal spending through one bank account for its first two years. When the bank asks for accounts, every one of those transactions has to be sorted into business or personal before a return can be supported. A dedicated business bank account and a basic chart of accounts in the first week of trading would have avoided most of that work.

Legal requirements: why record-keeping is not optional

Three distinct legal frameworks require Sri Lankan businesses to maintain accounting records.

Companies Act No. 7 of 2007 puts every company under a duty to keep accounting records (section 148), and requires financial statements to be prepared from them each year (section 150) [2]. The Act does not prescribe a method, but double-entry is the standard way to meet it.

Inland Revenue Act requires a taxpayer engaged in business to keep and maintain in Sri Lanka records and accounts sufficient to record all transactions and to ascertain the profit or loss on them, and to retain the source documents behind them [3]. Records must be kept for five years from the date of the transaction, or longer where the time limit for assessment has not expired or related proceedings are still running [3]. If proper records are not kept, the Commissioner-General may direct you to keep specified records, in addition to prosecution, and the Assistant Commissioner is not bound by your return and may determine your tax from any information available [3].

VAT Act requires every VAT-registered business to maintain tax invoices, purchase records, and a VAT account tracking input and output tax separately. The VAT Act has its own record-keeping provisions; as a working rule, keep VAT records at least as long as your income tax records.

All three obligations run in parallel. Meeting one does not substitute for the others. See the tax registration checklist for the registration steps that typically trigger bookkeeping obligations, and track all filing deadlines using the tax calendar.

The five-step bookkeeping setup process

Setting up a bookkeeping system takes less time than recovering from not having one. Work through these five steps in order.

1. Choose your recording method. Manual ledgers work for very simple, low-volume operations but create reconciliation problems as transaction volume grows. Spreadsheets give more control but require strict discipline and have no audit trail. Cloud accounting software (QuickBooks Online, Xero, Zoho Books) automates bank feeds, flags duplicates, and supports multi-user access. The most practical choice for any business expecting growth or statutory audit.

1. Set up your chart of accounts. Design account categories that match how you actually manage the business. Too few accounts makes reporting vague. Too many accounts makes consistent coding impossible. See the structured account code guide in the next section.

1. Open a dedicated business bank account. Every transaction that runs through a personal account creates a classification problem. Open and use a dedicated business account before recording anything. If the owner pays for a business item personally, record it as a clear owner contribution or reimbursement. Not as a business expense that disappears into mixed transactions.

1. Establish your document flow. Define who collects source documents, where they are stored, and by when they must be submitted. A document that arrives late causes an entry error in the period it belongs to. A weekly collection routine prevents most of the reconciliation problems that are later labelled as accounting errors.

1. Set up a financial reporting cycle. Decide whether you will close monthly or quarterly, who reviews the outputs, and what decisions depend on them. Most businesses that are VAT-registered or run a payroll need monthly close. Check the tax calendar for the statutory deadlines that set your minimum reporting frequency.

Chart of accounts structure with account codes

The code ranges below give a starting framework for a trading or service business in Sri Lanka. Account descriptions should be adjusted to match your specific business. The number range tells the system which category each account belongs to.

Assets (1000-1999)

• 1010 Cash in hand
• 1020 Bank account. Primary operating account
• 1030 Bank account. Secondary account if used
• 1100 Accounts receivable (trade debtors)
• 1150 Provision for doubtful debts
• 1200 Inventory: raw materials
• 1210 Inventory: finished goods
• 1300 Prepaid expenses
• 1500 Equipment
• 1510 Vehicles
• 1520 Furniture and fixtures
• 1590 Accumulated depreciation (contra-asset, reduces 1500-1520)

Liabilities (2000-2999)

• 2100 Accounts payable (trade creditors)
• 2200 Bank loan payable
• 2300 EPF payable: employee share
• 2310 EPF payable: employer share
• 2320 ETF payable: employer contribution
• 2400 VAT payable
• 2500 APIT payable (employee income tax withheld)
• 2600 Income tax payable
• 2700 Accrued expenses

Equity (3000-3999)

• 3100 Share capital
• 3200 Retained earnings brought forward
• 3300 Current year profit or loss

Revenue (4000-4999)

• 4100 Sales: local
• 4110 Sales: export
• 4200 Service income
• 4300 Other income

Expenses (5000-5999)

• 5010 Cost of goods sold
• 5100 Salaries and wages
• 5110 Bonus and overtime
• 5200 EPF employer contribution (12%)
• 5210 ETF employer contribution (3%)
• 5300 Rent expense
• 5400 Utilities
• 5500 Marketing and advertising
• 5600 Professional fees
• 5700 Depreciation
• 5800 Bank charges and interest
• 5900 Miscellaneous expenses

When the business outgrows its original account codes, plan a chart-of-accounts change that preserves comparatives.

Double-entry bookkeeping: the three core entry types

Double-entry is the standard method. Every transaction creates an equal and opposite entry: total debits always equal total credits. This self-checking mechanism makes errors detectable.

Three types of entries together account for the majority of transactions in most small businesses.

Sales entry. Goods sold on credit for LKR 50,000:

• Debit Accounts Receivable 50,000
• Credit Sales Revenue 50,000

When the customer pays:

• Debit Bank 50,000
• Credit Accounts Receivable 50,000

Purchase entry. Supplier invoice received for LKR 30,000:

• Debit Cost of Goods Sold 30,000
• Credit Accounts Payable 30,000

When payment is made to the supplier:

• Debit Accounts Payable 30,000
• Credit Bank 30,000

Payroll entry. One employee, LKR 200,000 gross for the month:

• Debit Salaries Expense 200,000
• Credit Bank (net pay to the employee) 181,000
• Credit APIT Payable (employee income tax withheld) 3,000
• Credit EPF Payable. Employee share 8% 16,000
• Debit EPF Expense. Employer share 12% 24,000
• Credit EPF Payable. Employer share 12% 24,000
• Debit ETF Expense. Employer 3% 6,000
• Credit ETF Payable. Employer 3% 6,000

The APIT figure uses the monthly table: the first Rs 150,000 is relieved and the next Rs 50,000 is taxed at 6 percent [4]. EPF is 8 percent from the employee and 12 percent from the employer, and ETF 3 percent from the employer [5] [6]. Net pay is 200,000 less 16,000 EPF and 3,000 APIT. With several employees, work the APIT per employee from the tables.

Payroll entries connect directly to your EPF, ETF, and APIT filing obligations. See the APIT return filing guide for the mechanics of employee tax deduction, the applicable rate tables, and remittance deadlines.

For money received before delivery, distinguish customer advances from earned revenue before choosing the sales entry.

Source documents by transaction type

A bookkeeping entry without a source document is an assertion. An entry backed by a source document is evidence. Tax assessors and statutory auditors work from evidence, not assertions.

Sales transactions:

• Signed sales invoice with sequential numbering
• Delivery note (for goods-based sales)
• Cash receipt for cash sales
• Bank advice or transfer confirmation for electronic receipts

Purchase transactions:

• Supplier tax invoice
• Purchase order (if your business uses them)
• Goods received note confirming delivery
• Payment voucher (internal approval record)
• Bank transfer confirmation

Payroll transactions:

• Monthly payroll register showing gross pay, all deductions, and net pay per employee
• EPF Form C contribution schedule and payment receipt
• ETF contribution schedule and payment receipt
• APIT deduction schedule (showing APIT paid to the IRD on employees' behalf)
• Bank advice for salary transfers

Bank transactions:

• Monthly bank statement
• Cheque stubs or counterfoils
• Deposit slips
• Bank transfer confirmations and SLIPS/CEFTS advice

Cash and petty cash transactions:

• Numbered petty cash vouchers signed by requester and approved by authorised signatory
• Original receipt attached to each voucher
• Cash register rolls for cash-based retail operations
• Petty cash count sheet at each reconciliation

Fixed asset acquisitions:

• Supplier invoice showing asset description and cost
• Delivery or installation certificate
• Board resolution or management approval memo for larger purchases
• Depreciation schedule updated in the asset register

Store physical originals or digital scans. Whatever the form, keep records you can produce to the IRD if asked, within the time a statutory notice gives.

Monthly bookkeeping routine

A practical monthly close does not require enterprise complexity. It requires clear ownership and deadlines that are respected.

1. Collect all source documents for the month and confirm completeness against the transaction list.
2. Reconcile the bank statement to your bank ledger. Investigate and clear every line that does not agree.
3. Review accounts receivable. List all unpaid invoices, note how many days past due, and send statements to overdue customers.
4. Review accounts payable. Confirm what is owed to suppliers, check payment due dates, and flag anything due in the next two weeks.
5. Process payroll and post all payroll journals including EPF, ETF, and APIT entries.
6. Post accruals for expenses incurred but not yet invoiced (rent, utilities, professional fees).
7. Post prepayment adjustments for expenses paid in advance that relate to future periods.
8. Reconcile the VAT account. Confirm that output VAT on sales minus input VAT on purchases equals the amount payable on your VAT return. VAT-registered businesses should review the VAT registration and compliance guide to understand which transactions require a compliant tax invoice.
9. Reconcile petty cash. Count the cash, total the unsubmitted vouchers, and confirm they equal the float amount.
10. Produce a draft profit and loss statement and balance sheet before the close date. Review the numbers before the month is too far gone to investigate surprises.

Accounts receivable management

Accounts receivable represents money customers owe for work already done. Leaving it unmanaged creates cash shortfalls that do not show up until the bank balance drops.

A basic receivable control system includes:

• Sequential invoice numbering (gaps in the sequence are a red flag)
• Invoice due dates recorded on every ledger entry
• Aged receivables report run at least monthly. Columns for current, 30 days overdue, 60 days overdue, 90+ days overdue
• Credit limits set for customers who regularly buy on credit
• Written credit terms on invoices and in customer agreements
• Follow-up process for overdue balances: statement, telephone call, formal notice, escalation
• Write-off policy for debts that become unrecoverable, with documented authorisation for each write-off

Accounts payable management

Accounts payable represents money owed to suppliers. Paying late damages supplier relationships and may attract contractual penalties. Paying early when cash is tight damages liquidity. Paying the same invoice twice damages both. For what moves to an outside team and what stays, see accounts payable outsourcing.

A basic payable control system includes:

• Three-way match before payment: supplier invoice, purchase order, and goods received note must all agree on quantity, description, and price
• Payment-term tracking. Record the due date on every entry, not just the invoice date
• Aged payables report run monthly to show what is due and when
• Authorised signatories list for payment approvals. Not every staff member should be able to release a payment
• Separation of payment input and payment approval where staffing allows
• Supplier statement reconciliation at least quarterly. Compare your payable balance to what the supplier claims you owe

Petty cash management

The imprest system keeps petty cash under control without creating administrative overhead for every small purchase.

Set a fixed float amount (for example, LKR 10,000). Every time cash is taken from the box, record a numbered petty cash voucher with the amount, purpose, and an authorisation signature. Attach the original receipt to the voucher. When the float drops to a designated replenishment threshold (for example, LKR 3,000), submit the accumulated vouchers for reimbursement. The reimbursement brings the float back to LKR 10,000.

At any point, cash in the box plus the total of unsubmitted vouchers should equal the float amount exactly. Any difference is a shortage that must be explained and recovered. Not carried forward to the next reconciliation.

Fixed asset register

A fixed asset register records every capital item the business owns. It supports depreciation calculations, insurance valuations, and responses to tax authority queries about asset costs and ownership.

Each entry should include:

• Asset description and serial number or identification
• Purchase date
• Supplier name and purchase invoice number
• Purchase cost (excluding VAT where the input credit is recoverable)
• Depreciation method and estimated useful life (consistent with LKAS 16)
• Annual depreciation charge
• Accumulated depreciation to date
• Net book value
• Physical location of the asset
• Disposal date and proceeds if the asset has been sold or scrapped

Review the register annually and reconcile the net book value total to the fixed asset balance in the balance sheet.

Bank reconciliation step by step

Bank reconciliation confirms that your cash ledger matches your bank statement. It is the single most important control in small business bookkeeping because it catches errors, unauthorised transactions, and timing gaps before they accumulate.

1. Obtain the bank statement for the period.
2. Tick off every item on the bank statement against your cash ledger. Each debit on the statement matches a credit entry in your books, and each credit on the statement matches a debit in your books.
3. List all items on the bank statement not yet in your books: bank charges, interest, direct debits not previously notified, returned cheques. Post journal entries to record these now.
4. List all items in your books not yet on the bank statement: cheques issued but not yet cleared, deposits made but not yet credited. These are timing differences. Do not adjust for them, they will clear in the next period.
5. Apply the reconciliation formula: Bank statement closing balance, plus outstanding deposits, minus outstanding cheques = your adjusted cash ledger balance.
6. If the formula does not balance, there is an error. Do not carry forward an unexplained difference. Find it before closing the period.

Run this reconciliation every month at minimum. For businesses with high transaction volume or tight cash timing, weekly reconciliation catches problems while the memory of transactions is still fresh.

Record retention: the five-year rule

Records must be kept for at least five years from the date of each transaction, and for longer where the time limit for assessing the relevant tax period has not expired or related proceedings are still running [3]. Keep VAT records on the same basis.

What must be retained:

• All source documents: invoices, receipts, payment vouchers, bank statements, contracts, loan agreements
• Payroll registers and all statutory deduction schedules (EPF, ETF, APIT)
• VAT returns and the supporting tax invoices for every VAT period
• Financial statements, management accounts, and trial balances
• Bank reconciliation workpapers
• Fixed asset register and depreciation schedules
• Board minutes and shareholder resolutions that approved financial statements

Keep records in a form you can produce to the IRD if asked. Paper or digital, each record should be complete and easy to retrieve. If you store records digitally, a system that logs changes, such as a cloud accounting platform with activity logs, helps you show that a record has not been altered.

Records must be accessible during a statutory inspection. If the Commissioner General or a VAT officer requests records, the business must be able to produce them within the timeframe stated in the notice. Inability to produce records on request can itself constitute a compliance failure.

Preparing for statutory audit

Statutory audit requires auditors to express an opinion on whether financial statements give a true and fair view. Their work starts from your records. The fewer gaps and errors they find, the faster and cheaper the audit process will be.

Bookkeeping that prepares you for audit without rework:

• Reconcile every balance sheet account monthly. Auditors test balance sheet items, not just income and expense
• Maintain a schedule for every accrual, prepayment, and provision with the calculation basis
• Keep source documents organised and retrievable, not in an unsorted box
• Resolve unusual or large transactions at the time they happen. Unexplained journal entries attract audit procedures
• Maintain the fixed asset register and reconcile it to the ledger balance at year-end
• Ensure all related-party transactions are identified, documented, and authorised

For tax audit specifically. The tax return preparation process works from the same books as the financial statements. If the books can support the statutory audit, they can support the tax return. See the corporate income tax guide for how the tax computation connects to your financial statements and what adjustments are typically required.

Common bookkeeping mistakes

• Mixing personal and business transactions. The most common problem and the most expensive to unwind. Use separate accounts from the first day.
• Recording by memory instead of source document. Estimated entries become errors. Always attach the supporting document before posting.
• Leaving bank reconciliation until month-end. By then, small errors have compounded and the transactions are harder to recall. Weekly or bi-weekly reconciliation catches problems while detail is still accessible.
• Inconsistent account coding. The same supplier appears under three different account names, reports become unreliable, and the chart of accounts loses its analytic value.
• Missing statutory deadlines because bookkeeping was behind. EPF and ETF contributions, VAT returns, and APIT remittances all have fixed deadlines with penalties for late payment. The tax calendar shows every filing and payment deadline in one place.
• Not recording depreciation. Fixed assets stay on the balance sheet at full purchase cost indefinitely. The balance sheet overstates asset value and tax computations are wrong.
• Treating owner drawings as business expenses. Owner withdrawals reduce equity, not profit. Misclassifying them inflates the expense line and understates actual profit.
• Failing to back up data. A single system failure without a backup can mean recreating months of work. Cloud software provides automatic backups; local software requires a scheduled backup routine.

Bookkeeping software for Sri Lankan businesses

Cloud-based options with strong Sri Lanka adoption:

• QuickBooks Online. Broad feature set, reliable bank feeds, strong reporting, widely supported by local accountants and bookkeepers
• Xero. Clean multi-user interface, strong integration with payroll and inventory add-ons, good audit trail controls
• Zoho Books. Affordable entry point, handles LKR and multi-currency

Desktop and regional options:

• MYOB. Used by some mid-sized Sri Lankan businesses, more established in manufacturing and retail
• Sage Business Cloud. Scalable solution used in some regulated industries

For very early-stage businesses, a well-structured spreadsheet can substitute for accounting software if transaction volume is low and the chart of accounts is applied consistently. The risk is that spreadsheets have no audit trail, no access controls, and no separation between data entry and formula logic. Move to accounting software before transaction volume creates spreadsheet management problems: not after.

Signs your books have outgrown DIY

DIY bookkeeping is reasonable for sole traders and very early-stage businesses with low transaction volume and simple structures. These indicators signal that professional support is likely to pay back in time saved and risk reduced:

• Monthly transaction volume consistently exceeds 100 to 150 lines
• The business is VAT-registered and preparing monthly VAT returns
• The payroll run involves five or more employees
• A bank or investor has requested audited or reviewed financial statements
• The last set of accounts was completed more than six months after year-end
• A tax assessment has arrived because records were insufficient to support the return
• Director or owner time spent on bookkeeping is displacing time spent on the business itself

Talk to us. If any of those fit, our bookkeeping team can review your current setup and the gaps in it; book a consultation at our contact page.

This guide is general information on the law as at 15 October 2026 and is not advice on your specific situation.

References

1. CA Sri Lanka. Sri Lanka Accounting Standards (SLFRS and LKAS). https://www.casrilanka.com . Secondary. Accessed 15 October 2026.

1. Parliament of Sri Lanka. Companies Act, No. 7 of 2007, ss.148 (duty to keep accounting records) and 150 (obligation to prepare financial statements). https://drc.gov.lk/en/wp-content/uploads/2018/04/Act-7-of-2007-English.pdf . Primary. Accessed 15 October 2026.

1. Inland Revenue Department. Inland Revenue Act, No. 24 of 2017, consolidated, ss.120(1), (3), (5) and (6) and 126(3). https://www.ird.gov.lk/en/publications/Acts_Income%20Tax_2017/IRA_Cons_Act_-_2025_Changes.pdf . Primary. Accessed 15 October 2026.

1. Inland Revenue Department. Circular SEC/2025/E/01: Guideline for employers on deducting APIT from employment income (25 March 2025), Table 01. https://www.ird.gov.lk/en/publications/Circulars_Circulars/SEC_2025_E_01_E.pdf . Primary. Accessed 15 October 2026.

1. Central Bank of Sri Lanka. Employees' Provident Fund Act, No. 15 of 1958 (reprint), s.10. https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/laws/acts/en/epf_act.pdf . Primary. Accessed 15 October 2026.

1. Employees' Trust Fund Board. Employees' Trust Fund Act, No. 46 of 1980, s.16. https://etfb.lk/wp-content/uploads/2021/03/ETF-Act.pdf . Primary. Accessed 15 October 2026.