Running a successful business entails keeping accurate and timely financial information. A clear financial picture allows you to monitor the success or failure of your business. A good record keeping system also provides you with the information you need to evaluate the financial consequences of your financial decisions.
As a small business owner, you probably rely on an outside accountant to do your taxes and prepare financial statements. However, it is best that you or someone in your organization take on the responsibility of keeping an accurate set of financial records. Doing the routine bookkeeping chores yourself, however unpleasant it may seem, will minimize your costs of paying an accountant and allow you more control of your financial information and operations.
For starters, make sure that you file paid bills, canceled checks and other business documents in an orderly fashion and keep them in a safe place. You may use manila folders, filing boxes, or an accordion file divided into “car,” “utilities,” “entertainment” and so on. At a minimum, put receipts in the proper categories throughout the year so it would be easier to total them up at tax time. Staple the adding machine tape to each folder or stack of receipts. You are not required to keep records in a formal “set of books;” however, you need to find the best record keeping system that works for you.
Criteria to a Good Record-Keeping System
A good record-keeping system offers a number of benefits to your small business:
- Allows you to easily retrieve information about your business, particularly its financial history.
- It will also help your case in the event the taxman questions your tax returns. Showing the taxman that you have a solid record-keeping system proves that your documents can be relied upon and are accurate.
- Helps you easily prepare your financial statements
- Enables you to track how your business performs
- Allows you to easily recognize threats, opportunities and weaknesses in your business
- Fulfill your record keeping obligations provided by your government
Your business records management should meet the following criteria:
- Your record keeping system should be consistent with the nature and size of your business
- It should be simple, logical and easy
- It should be accurate and thorough
- It should be easy to understand
- It should be complete
- Your record-keeping should be integrated into your daily schedule
What Business Records to Keep
Take record keeping seriously. A perfectly adequate record keeping system for a small business might include some or all of the following:
- Check register – preferably a separate bank account for your business. Make sure that when you receive your bank statement every month that you prepare bank reconciliation. This document will help you balance your checkbook.
- Summary of receipts of gross income – totaled daily, weekly or monthly. Keep track of where your money comes from, putting notes explaining the origin of all money received
- Monthly summary listings of expenses, including expense distribution schedules and expense analyses = 3 years
- Financial statements = keep permanently
- Disbursements record (check register or expense journal) showing payments of bills. This could be a purchase journal or an expense journal where you record all the transactions in which you paid out cash or checks.
- Asset purchase listing (equipment, vehicles, real estate used in business)
- Duplicate deposit slips = keep for 3 years
- Employee compensation and benefit plan records (if you have employees) = 7 years
- Audit reports of accounts = keep permanently
- Trademark registration and records = keep permanently
- General and private ledgers = permanently
- Canceled checks = typically for 7 years except for important payments such as property purchase, state and federal income taxes, special contracts, etc. where you need to keep the canceled checks permanently
- Bank statements = keep for 7 years
- Invoices to customers and from vendors = keep for 7 years
- Contracts and leases = if expired, keep for 7 years; but keep the records permanently f the contracts and leases are still in effect
- Legal and Important Correspondences = keep permanently
- Mortgages and Bills of Sale = keep permanently
- Insurance records, including claims and policies = keep permanently
- Gross receipts such as receipt books, cash register tapes, credit card charge slips, receipt books = keep for 7 years
Recommended Books on Business Record-Keeping:
- Keeping the Books: Basic Recordkeeping and Accounting for the Successful Small Business
- Keeping Financial Records for Business
- Bookkeeping For Dummies
- Quick & Simple Record Keeping for Owner/Operators
- Accounting and Recordkeeping Made Easy for the Self-Employed
- Good Record Keeping for Your Small Business
- How to Manage Home Business Cash Flow Effectively
- Top Expert Tips to Better Manage Your Taxes
- How to Start a Business in the UK if you’re in Debt
- What to Do If You Are Audited by the IRS