Accurate Recordkeeping for Small Businesses is Critical
It is important that recordkeeping for small business owners keep accurate records. No business is exempt, regardless what the number of employees that they have, over 50 or just a few. And, it doesn’t matter if they manufacture floss or floss teeth. Or, they harvest rolled oats or make rolling papers. A successful business will maintain reliable records. Let’s go over some tips that answer the questions to help small business owners implement best practices for maintaining records.
Should all business owners keep records?
The answer is absolutely! When maintaining accurate recordkeeping for small businesses, precise records will make things much easier. Best practices include reviewing the business improvements and progress. Another thing to always do is monitor expenses, along with pinpointing where your income sources are. Next, make it a habit to look over financial statements. And finally, prepare tax returns and keep all source documents for items on tax returns.
What types of records should owners keep?
As a small business owner you are free to use any recordkeeping option that fits your business. The IRS recommends an accouting system that facilitates maintaining accurate recordkeeping for small businesses, the most popular are Quickbooks and Quicken. Select one that obviously breaks out income and expenses. Other than a few rare events, the law doesn’t demand unique types of records.
Cash Receipts and Disbursements
A small business owner should monitor cash receipts and disbursements daily, and keep a monthly schedule. This schedule is typically a spreadsheet. The spreadsheet balances with any petty cash or payments made out of the expense accounts. A cash receipt is any income taken in by cash, check, debit or credit card or electronic funds. Cash disbursements are an expenses paid out by the same means. Disbursements are any expense necessary to keep the business running. Worksheet schedules protect you by means of supportive recordkeeping. Also, most banks and credit card companies will allow you to review and online statement of your spending. Usually, when you forget to journal a transaction, when your reconcile an account against your spreadsheet, you will find the error. The key is keeping everything accurate though. Make it a daily practice, taking ten minutes a day and you should be able to reconcile easily.
What transaction source documents are important to keep?
Source documents for purchases include receipts and any canceled checks. Make sure that you don’t mix personal expenses from business expenses. Small business owner’s use this information to create accounting ledgers and journal entries. Other source documents would be employee records, statements and latest contracts with signatures and dates. The original paper must be electronically scanned or kept with the ledgers and stored safely. Also, make sure you have a contingency plan just in case of a building disaster such as a fire or flood. Again, a great way to protect your business is to scan each document into a computer file and stored on a thumb drive. We can’t stress it enough, back up all your files.
How long does my business need to hold on to records?
There are several things to keep in mind when addressing this question. The fact is, it really is subject to the issue at hand. Things to consider: what the record was for, was is the event the document is supporting, was it an expense, was it cash income? Also, make notations to explain unique situations. The IRS usually suggests taxpayers keep records for a minimum of three years. However, with scanning technology, you are able to store them much longer with less much less storage space. Just make certain your hard drive is large enough to handle the capacity.
Businesses Record Transactions
A clean recordkeeping system includes a summary of all business transactions, including the date, the client or vendor, and the terms of the agreement. Journals and ledgers are the old fashion way for keeping records. Small business owners can still purchase journals at an office supply store. But why keep paper? I get it, not everyone is computer savvy; however, paper is hardly space efficient. However, better yet, we strongly suggest the best way to maintain accurate recordkeeping for small businesses is to have an accounting software. And, keep in mind, the requirements are no differnt for a hard-bound book or electronic business records.
Electronic Fund Transfers (EFT)
Technology has made business recordkeeping so much easier. You no longer need to write a paper check any more. Now you can use a credit card or debit card, and banks now allow for electronic funds transfer (EFT) to pay bills directly out of your checking account. You simply go online with your bank and set up your account electronically. This helps enormously with accurate recordkeeping for small businesses.
What does the IRS look for on source documents?
When using an EFT, a debit card or credit cards, usually the bank publishes the financial statements online. You simply need to download those statements and keep them in a file on your computer. Electronic Fund Transfers must show the date of transfer, along with the amount and who the payee is. And, programs such as Quickbooks or Quicken will have an automation process available to directly post the transaction to your general ledger. This is also true for debit/credit cards, the statement must show the charge amount, who the payment was sent to, along with the transaction date.
Proof of payment on its own does not necessarily mean you are entitled to a tax deduction. Keep credit card slips and invoices to substantiate your claim of a deduction.
Who is responsible for burden of proof?
Um, that would be the business owner. Yes, the burden of proof rests on you, the small business owner. Basically, burden of proof means, responsibility to prove how accurate the recordkeeping for the small business is. Therefore, the responsibility to validate information on tax returns is known as the burden of proof. Small business owners must be able to prove expenses to deduct them. Everything must be proven.
How does my business keep employment tax records?
Employee records include payroll and payroll taxes. Let’s face it. They all maintain sensitive information, so a lock and key is a non-negotiable requirement. Keep in mind that payroll is intricate, especially with the new tax tables. Our Online Tax Guide is available to help you navigate your questions. It addresses tax implications for investors, individuals and business tax issues. of employee business tax. Keep unusually good records for your employees.Regarding employment tax records, accurate recordkeeping for small business owners must be kept for at least four years. Yet, again, when you have electronic media, you can always store this information for a little longer. And, remember, these records must be secure and kept under lock and key.
Do you have questions about accurate recordkeeping for small businesses?
Small businesses with recordkeeping questions, feel free to call Alex Franch, BS EA. Our team of tax experts offer competitent business consulting all year round. We look for accounting problems that affect small businesses. Alex can be reached at 781-849-7200 or email him at email@example.com. And even though tax season is officially past, for those who filed extentions, don’t wait until the last minute. Gather your supporting documents and set up your an appointment today! And for new clients, we offer numerous client discounts to save you money.
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning.
Sources and Resources
- Important Tax Deduction Changes Under Tax Reform
- Start off 2019 Tax Year Right!
- E-file Cash Transaction Reports to Battle Against Crime
- Who is Responsible for Massachusetts Tax Filing
- How to Select a Tax Expert, Avoid Dishonest Tax Preparers
- Landlords Are You Collecting-w-9s?
- 7 Ways Small Business Owners Save Money on Taxes Legally
- Getting the W-4 Right is Important!
- Natural Disaster Relief
- Emergency Savings: 67% of People Don’t Even Have $500 Emergency Fund
- Did You Donate to Charity?
- Don’t Expect the IRS to Take Your Word on Charitable Deductions – Substantiate