The importance of good, and separate, business records
Saturday, March 01, 2014
Many small business owners find that one of the hardest parts of being the boss is taking care of administrative tasks.
You started your business because you are good at something, like making cabinets or baking cakes or designing jewelry. All this paperwork just gets in the way!
But all this paperwork is critical to your company's success. And proper recordkeeping will ensure that you don't overlook anything.
Today's Daily Tax Tip looks at some business recordkeeping highlights included in IRS Publication 583, helpfully named Starting a Business and Keeping Records.
Your records system choice: Generally, you can choose the recordkeeping system that best fits your business. Just make sure that it clearly shows your income and expenses.
If you operate more than one business, keep a complete and separate (there's that word again) set of records for each business.
Your recordkeeping system should include a summary of your business transactions. This generally includes your books, such as accounting journals and ledgers. These records must show your gross income, as well as your deductions and credits.
For most small businesses, the business checkbook is the main source for entries in the business books.
And if you're comfortable with digital records, that's OK. Just note that all requirements that apply to hard copy books and records also apply to your business' electronic records storage systems.
The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS.
Save supporting documents: In addition to your books, you need to keep supporting documents. This material supports the entries in your books and on your tax return.
These include sales slips, paid bills, invoices, receipts, deposit slips and canceled checks. Basically, any business transaction you conduct generates supporting documents.
Documentation examples of your business' income, or gross receipts, include cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and 1099-MISC forms.
Purchases are the items you buy in order to make the product you sell to customers. Your supporting documents in this area should show the amount you paid and that the amount was for purchases. Documents here include canceled checks, cash register tape receipts, credit card sales slips and invoices.
Then there are your expenses. These are the costs you incur other than purchases to carry on your business. Supporting documents for expenses should show the amount paid and hat the amount was for a business expense. Expense documentation includes canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments.
You gotta keep 'em separated: Keeping good records is much easier when you make sure your business and personal expenses aren't comingled.
As the accounting services firm Bench notes, for a business to actually be considered a business, it should look and conduct itself like a business.
This often is a challenge for sole proprietors, who are the business. The tendency, especially for new one-person start-ups, is to use a personal credit card for company purchases and then stick those receipts in the business files.
You'd be better served, however, by having separate business credit card and bank accounts. These dedicated company accounts will produce the kind of records that will demonstrate to the Internal Revenue Service that you are doing your best to differentiate between personal and professional.
Finally, keep all your business records in an orderly fashion and a safe place. That way they'll be handy when you work on your annual budget, update your business plan, apply for financing to expand your business or, and let's hope this never happens, an IRS auditor ever has any questions.
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