As a small business owner, are you wondering what types of records to keep in your business? It can take valuable time out of your day, so is it worth it? What is required by law? Should you just keep the bare minimum? What is the bare minimum?
These are questions that many business owners have, and the IRS has issued publications covering this matter. While one should refer to the IRS website for the full and exact information on what is required by law, here is some general information on what to be thinking with when it comes to your bookkeeping records. The full information is covered on their website, in addition to Publication 583 (among others). Click here to read more on the IRS website.
Per the IRS, you may choose any record keeping system suited to your business that clearly shows income and expenses. Of course, that depends on your business. So, what does that mean? Well, a good record keeping system would clearly summarize your business transactions, including income and expenses. These records are normally kept in accounting journals and ledgers. (In this day, the journals and ledgers are typically done with accounting softwares such as Quickbooks or Xero.)
Types of Records to Keep:
In addition to your accounting software, there are other types of records you should keep, such as:
- Supporting documents for all sales, purchases, payroll and other transactions made in your business. For example:
- Receipts (showing the amount paid for your expenses, and for what)
- Paid bills
- Sales slips
- Invoices
- Cancelled Checks
- Gross receipts for the income you receive in your business. You should keep supporting documentation which shows the amounts received, such as:
- Bank deposit slips
- Receipt books
- Invoices
- Credit Card Charge Slips
- Forms 1099-MISC and 1099-NEC
- Inventory: If you keep inventory, meaning items you buy and resell to customers, your supporting documents would show what you paid as well as the amount of supplies purchased.
- There are various other more detailed records that are needed in specific cases, such as travel expenses, employment taxes and assets which have their own specific rules.
Why is it Necessary or Important to Keep Good Records?
You might ask yourself why it is necessary or even important to keep track of all the above. Depending on the size of your business, it could add up to a lot of documentation! Fortunately, there are definite benefits to taking the time for proper record keeping. Some examples are:
- It allows you to keep track of deductible expenses.
In order to be able to write off your business expenses, you have to know what they are! By keeping proper records and supporting documentation, it will be easy for you to determine what business expenses you have incurred, and thus be able to maximize your tax deductions.
- Preparing financial statements.
In order to know where your business stands financially, you have to have all of the proper records in place. The financial statements will tell you exactly where your business stands financially, and help you to make proper business decisions. If you don’t know how much money you’re making or losing, you won’t be able to adapt or improve your services at all to ensure you’re profitable!
- Preparing your tax returns.
If you don’t have any idea of how much money you made, you won’t know what to report to the IRS come tax season. And we all know that the government doesn’t take too kindly to anybody who doesn’t pay their taxes! So, in addition to helping you see where your business is at, it makes it possible to stay compliant on your taxes.
- It’s required upon inspection from the IRS.
Nobody wants to get audited by the IRS, but if this does happen to you, you’ll be a lot happier if you have all of your records in place! If you have all of your receipts, supporting documentation, proper accounting software, etc., and the IRS can see that you’re reporting your taxes properly, they’ll move on. If you don’t have proper supporting documentation, such as receipts for your business expenses, they may require you to pay taxes on items you’d previously taken deductions on. So make sure you’re keeping your records in place!
Summary
As you can see, it’s important to keep proper business records, and to store them. Hopefully this information has helped shine some light on what is required, and where you can get more information on specifics.
Fortunately, it doesn’t have to be too hard to keep all of your records! Many accounting softwares make it easy to take a picture of your receipt on your phone, and match it right up to the expense. In addition, many other documents can be easily uploaded to your software to be properly stored. If you don’t have the time or patience, you might want to consider hiring or outsourcing these tasks to a bookkeeper! (Click here to contact us if you’re interested in a free consultation.)
An important point, though, is to keep it up regularly. As with many things, the more you put it off and let it pile up, the more you will regret it later! And, come tax season, your accountant or tax professional may have trouble helping you file your taxes.
Do you have any questions, comments or feedback? Email us at contact@lucrativebookkeeping.com.
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