Why Should You Keep Records?
- Monitor the progress of your business;
- Prepare your financial statements;
- Identify source of receipts
- Keep track of deductible expenses;
- Prepare your tax returns
- Support items reported on tax returns.
Monitor The Progress of Your Business
Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of the success of your business. Good recordkeeping allows you to set goals. Measure those goals. Know when you reach them. Plan for shortfalls in finances. Plan to tax shelter windfalls. Plan for expansion or retraction.
Prepare Your Financial Statements
You need good recordkeeping to prepare accurate financial statements. These include income (profit and loss aka earnings) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
An income statement shows the income or sales, cost of goods and expenses of the business for a given period of time.
A balance sheet shows the assets, liabilities, and your equity or capital in the business on a given date, as well as your net profit or loss at the end of the year and your accumulated retained earnings depending on the tax entity staus of your business.
Identify Source of Receipts
In this case the word “receipts” means what you have received, not proof of what you have paid. Though you need to keep those records too, of course.
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. Types of receipts could include money and assets such as furniture or vehicles. Even money coming into your business could come from many sources. The IRS expects that you know and separate those sources of money.
Sources of money could include money from your own pocket that you put into your business either as a loan to be repaid to you, or as an investment for which you do not expect to be repaid.
Another source of money is “sales receipts” or sales income also known as sales revenuew. Money made from selling your goods or services.
Another source of receipts as money might be a loan you get from the bank, or a refund you receive from a business purchase, or even cash you receive from the sale of an asset. Good recordkeeping allows you to identify the sources of these receipts.
Keep Track of Deductible Expenses
Not all money that you spend in a business is deductible. Not all money spent in a business that is deductible is deductible in the same amount or percentage. Check with your tax accountant for more information. But more often than not, without keeping track of deductible expenses, you may forget expenses when it comes time to prepare your tax return thus actually costing you more money in taxes. You need to record each of your expenses as they occur. A simple notebook might do to start. Then work up to putting them in a spreadsheet. The best thing to do is buy a good piece of bookkeeping software. Many are on the market and you can research them yourself. I personally prefer QuickBooks beause of the variety of levels of software they produce and ease of startup use. And if 94% of small businesses buy and/or use QuickBooks (as of 2011), they have to be doing something right. But as I said you will find many on the market. Just a tip: also have your books reviewed on a monthly or quarterly basis by a professional bookkeeper because although QuickBooks is easy to use, you still need to know at the least basic accounting to perform a basic monthly review of your books.
Prepare Your Tax Return
You work hard for your money. You want to keep as much of it as possible while at the same time conforming to the law. You need good records to prepare your tax returns. You can't rely on memory. You don't want to incur penalties or interest due to late tax filing and/or late payments. Good recordkeeping puts everything in one place and yet organized to present a story and prove exactly what happened in your business over the last year. These records must support the income, expenses, and credits you report on your taxes. Generally, these are the same records you use to monitor and manage your business and prepare your financial statement.
Support Items Reported on Tax Returns
Besides using your records to prepare your taxes, you must keep these records for specified periods of time in case the IRS has any questions about your return. You must keep your business records available at all times for inspection by the IRS. If the IRS 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. Again, check with your tax accountant for a copy of "Record Storage Requirements" in case of a future audit. You'll find that seven to 13 years is not unrealtic for some records in some cases. Make sure you have a reliable records storage area in which to keep hard copy source documents. Organize your records by year. Your storage boxes should identify the tax year, the contents and the "Destroy Year". Older records in front. Newer records in back. This is one way to allow old records to be found quickly and easily when time to burn or shred.
So if you are a new business owner, remember to always wear your "Recordkeeping" hat along with the others you will be wearing. You will refer to those recofrds more than you think and with them you will have no trouble managing your business and conforming to IRS requirements.