Small business tip: Keep records, prepare for taxes
March 29, 2011 at 5:03 p.m.
Updated March 28, 2011 at 10:29 p.m.
Record keeping is considered by many entrepreneurs as one of the "least important" parts of operating a business.
However, good record keeping is essential to your financial survival. Here is a quick, crash course on basic record keeping.
Monitor progress of your business
Good record keeping can show whether your business is improving, which items are selling and what changes are needed. Good record keeping can be the difference between failure and success.
Prepare accurate financial statements
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. An income statement shows the income and expenses of the business for a given period of time. A balance sheet shows assets, liabilities and your equity in the business on a given date.
Prepare your tax returns
Records must support the income, expenses and credits you report on your tax returns. Generally, these are the same records you use to monitor your business and prepare your financial statements.
You must keep your business records available at all times for inspection by the Internal Revenue Service. 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.
What kind of records should you keep?
Except in a few cases, the law does not require any special kind of records. You may choose any system suited to your business that clearly shows your income. Keep it simple; choose a system that you understand and can manage. This will greatly affect your ability to keep up with inputting data.
The type of business you operate affects the type of records you need to keep for federal tax purposes. You should set up your books using an accounting method that clearly shows your income for your selected tax year. If you are in more than one business, you should keep completely separate records for each business.
A few bookkeeping tips:
Daily business records are the best.
Identify source of receipts.
Record expenses when they occur.
Keep complete records on all assets.
Some supporting documents you will need
Purchases, sales, payroll and other transactions will generate supporting documents such as invoices and receipts. These documents contain the information you must record in your books.
It is important to retain these documents because they support the entries in your books and on your tax returns. You should keep them in an orderly fashion and a safe, secure place. Supporting documents include sales receipts, paid bills, invoices, receipts, deposit slips and cancelled checks. Generally, it is a good idea to keep your supporting documents in file folders in designated categories.
Gross receipts are the income you receive from your business. You should retain supporting documents, which show the amounts and sources of your gross receipts. Examples of gross receipts include: cash register tapes, bank deposit slips, invoices, credit card charge slips, email records, etc.
Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of raw materials and/or parts purchased for making into finished products.
Your supporting documents should show the amount paid for those purchases. Examples of documents for purchase include canceled checks, cash register tapes, credit card slips, email records and invoices.
These records will help you determine the value of your inventory at the end of the year.
Expenses are the costs that you incur to carry on your business. Your supporting documents should show the amounts paid for those business expenses. Examples of documents for expenses include email documents, canceled checks, cash register tapes, account statements, credit card slips, invoices and a petty cash system for small purchases.
Travel, transportation, entertainment and gift expenses require some extra documentation to deduct them as business expenses. For example, to deduct the cost of taking a client to lunch, you should record the name of the client, the purpose of the lunch and topic discussed at the lunch.
Assets are the property, such as your computer and fax that you own and use in your business.
You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and gain or loss when you sell the assets. Your records should show when and how you acquired the asset. Also include the purchase price, date of purchase, cost of any improvements, deductions taken for depreciation, how you used the asset, when and how you disposed of the asset, selling price and any expenses of the sale.
Example of these supporting documents may include purchase or sales invoices, real estate closing statements and canceled checks.
This is a just quick, crash course on basic record keeping. But, whatever your business, good record keeping is essential to your financial survival. So take the time and keep good records.
Kacey Lindemann Butler is a senior business advisor in the SBDC's Gonzales office.