Everyone in business must keep records. What can good record keeping do for you? I’ll give it to you in a straight no-glamour content.
Why Do Record Keeping?
Make sure you monitor the progress of your business:
Good record keeping can show whether your business is improving, which items are selling and what changes are needed. Good record keeping can be the difference between failure and success.
Prepare accurate financial statements:
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can be a big help when dealing with your bank and creditors. An income statement shows the income and expenses of the business for a given period of time. A balance sheet shows assets, liabilities and your equity in the business on a given date.
Identify source of receipts: You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from nontaxable income.
Keep track of deductible expenses:
You may forget expenses when you prepare your tax return unless you record them when they occur. Believe me you will need all the deductible expenses you can find.
Prepare your tax returns:
Records must support the income, expenses and credits you report on your tax returns. Generally, these are the same records you use to monitor your business and prepare your financial statements. You must keep your business records available at all times for inspection by the IRS and/or your State Department of Revenue. If the IRS or State Department of Revenue examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination and make the experience feel that much less like a rectal exam.
What Kind of Records Should You Keep?
Except in a few cases, the law does not require any special kind of records. You may choose any system suited to your business that clearly shows your income.
The type of business you operate affects the type of records you need to keep for federal tax purposes. You should set up your books using an accounting method that clearly shows your income for your selected tax year. If you are in more than one business, you should keep completely separate records for each business.
A few bookkeeping tips:
- Daily business records are the best
- Identify source of receipts
- Record expenses when they occur
- Keep complete records on all assets
Some supporting documents you will need:
Purchases, sales, payroll and other transactions you have in your business will generate supporting documents such as invoices and receipts. These documents contain the information you must record in your books.
It is important to retain these documents because they support the entries in your books and on your tax returns. You should keep them in an orderly fashion and a safe place.
Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips and cancelled checks. Generally, it is a good idea to keep your supporting documents in file folders in designated categories. For example, if you write a check to Joe’s Office Furniture and record the expense as “office supplies”, then the receipt should be placed in a folder marked “office supplies”.
Gross Receipts are the income you receive from your business. You should retain supporting documents, which show the amounts and sources of your gross receipts. Examples of gross receipts include cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips, email records and your forms 1099-Misc.
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer this includes the cost of raw materials and/or parts purchased for making into finished products. Your supporting documents should show the amount paid for those purchases. Examples of documents for purchase include cancelled checks, cash register tapes, credit card slips, email records and invoices.
These records will help you determine the value of your inventory at the end of the year.
Expenses are the costs that you incur to carry on your business. Your supporting documents should show the amounts paid for those business expenses. Examples of documents for expenses include email documents, cancelled checks, cash register tapes, account statements, credit card slips, invoices and a petty cash system for small purchases.
A petty cash fund allows you to make minimal payments without having to write checks for small amounts. Each time you make a payment from this fund, you should prepare a petty cash disbursement slip and attach it to your receipt as proof of payment.
Travel, transportation, entertainment and gift expenses require some extra documentation to deduct them as business expenses. For example, to deduct the cost of taking a client to lunch, you should record the name of the client, the purpose of the lunch and topic discussed at the lunch.
Assets are the property, such as your computer and fax that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and gain or loss when you sell the assets. Your records should show when and how you acquired the asset. Also include the purchase price, date of purchase, cost of any improvements, deductions taken for depreciation and deductions taken for casualty losses like fires or storms, how you used the asset, when and how you disposed of the asset, selling price and any expenses of the sale. Example of these supporting documents may include purchase or sales invoices, real estate closing statements and cancelled checks.
This is a just quick, crash course article on basic record keeping. But, whatever your business, remember, good record keeping is essential to the your financial survival. So take the time and keep good records. The headaches you save may be your own.
About the Author:
- Record-Keeping: How to Keep Business Records
- Small Business Owner and Unpaid Taxes
- How to Save on Tax as a Home Business Owner in Australia
- Book Review: Keeping the Books: Record Keeping and Accounting
- 3 Organizing Tips for Tax Time