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.
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