Basic Business: Good Record Keeping
Everyone in business must keep records. What can good record
keeping do for you? I'll give it to in a straight no-glamour
content.
Let's Start Now:
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.
Thanks for reading