As a business owner, you may rely on an outside accountant to do your taxes and prepare financial statements. However, it's best that you or someone in your organization take on the responsibility of keeping an accurate set of financial records.
Keeping good records yourself, no matter how unpleasant it may seem, will minimize the costs of paying an accountant and allow you more control of your financial information and operations. Maintaining good records can also help you avoid headaches at tax time by keeping track of your receipts and other records throughout the year. This can help you remember the various transactions you made during the year so you can properly document and maximize your tax deductions.
Normally, tax records should be kept for three years, but some documents - records relating to a home purchase or sale, stock transactions, IRA and business or rental property - should be kept longer.
Good record keeping not only enables the IRS to evaluate your business activity through original and supporting documents, but it also gives you the information you need to properly manage and grow your business.
You can keep track of your business transactions by writing them down, usually in books such as journals or ledgers or by typing them into a computer software program. It's best to choose a system that's simple, yet can be changed to meet your needs in the future. An accounting system should show your income and expenses and can be easily understood, especially by you. If you have more than one business, it's best to keep completely separate books for each type of business activity.
The two basic types of bookkeeping methods are single entry and double-entry systems. Whether you choose to keep a written ledger or use computer software, record only the information that needs to be documented.
Single-Entry Bookkeeping
Single-entry bookkeeping uses a cash receipts journal, a cash disbursements journal and also the use of a checkbook. All business transactions are recorded in one of these journals. It is a practical bookkeeping system for small businesses that are just starting.
The cash receipts journal should contain a record of all the money that you receive. It should contain a column for items such as date, amount, and source of payment, the reason for the payment or anything that is of importance to your bookkeeping and of relevance.
Document the money that your small business spends in a cash disbursements journal. It should have columns for the various expenditures that your small business may have with a line for each expenditure, including description of expense, date, payee, check number and total amount.
Double-Entry Bookkeeping
As your business grows, you may need to adopt a double-entry bookkeeping system. This system provides more information to paint a more complete picture of your business at any particular point in time. This information may include available cash on hand, accounts payable, utilities, loans, etc.
Your small business should use a double-entry bookkeeping system if has significant accounts receivable, accounts payable, equipment that depreciates or inventory. If your business will meet any of these, you should select a double-entry system from the start. You'll use journals and ledgers to record information that reflect your business transactions.
Each transaction will be recorded twice, meaning the system will balance itself out. For example, if you make a loan payment, you will decrease the cash amount in your cash account and increase the exact amount in the expense account.
What Type of Records To Keep
The type of business you operate generally affects the type of records you need to keep for federal tax purposes. You'll need supporting documents to capture important details, such as your receipts, purchases, expenses, assets.
Here are some other basic record keeping tips to keep in mind:
"Daily business records are the best
"Identify source of receipts
"Record expenses when they occur
"Keep complete records on all assets
Remember, good record keeping is essential to the financial survival of your business. So take the time to keep good records, so you can run your business successfully - instead of it running you.
About the Author
Copyright 2005
Kate Smalley, Connecticut Secretary
Freelance Secretarial and Transcription Services
http://www.connecticutsecretary.comkms@connecticutsecretary.com
