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As a business owner, you may rely on
an outside accountant to do your taxes and prepare
financial statements. However, it’s best that you or
someone in your organization take on the responsibility of
keeping an accurate set of financial records.
Keeping good records yourself, no matter how unpleasant it
may seem, will minimize the costs of paying an accountant
and allow you more control of your financial information
and operations. Maintaining good records can also help you
avoid headaches at tax time by keeping track of your
receipts and other records throughout the year. This can
help you remember the various transactions you made during
the year so you can properly document and maximize your
tax deductions.
Normally, tax records should be kept for three years, but
some documents - records relating to a home purchase or
sale, stock transactions, IRA and business or rental
property - should be kept longer.
Good record keeping not only enables the IRS to evaluate
your business activity through original and supporting
documents, but it also gives you the information you need
to properly manage and grow your business.
You can keep track of your business transactions by
writing them down, usually in books such as journals or
ledgers or by typing them into a computer software
program. It’s best to choose a system that’s simple,
yet can be changed to meet your needs in the future. An
accounting system should show your income and expenses and
can be easily understood, especially by you. If you have
more than one business, it’s best to keep completely
separate books for each type of business activity.
The two basic types of bookkeeping methods are single
entry and double-entry systems. Whether you choose to keep
a written ledger or use computer software, record only the
information that needs to be documented.
Single-Entry Bookkeeping
Single-entry bookkeeping uses a cash receipts journal, a
cash disbursements journal and also the use of a
checkbook. All business transactions are recorded in one
of these journals. It is a practical bookkeeping system
for small businesses that are just starting.
The cash receipts journal should contain a record of all
the money that you receive. It should contain a column for
items such as date, amount, and source of payment, the
reason for the payment or anything that is of importance
to your bookkeeping and of relevance.
Document the money that your small business spends in a
cash disbursements journal. It should have columns for the
various expenditures that your small business may have
with a line for each expenditure, including description of
expense, date, payee, check number and total amount.
Double-Entry Bookkeeping
As your business grows, you may need to adopt a
double-entry bookkeeping system. This system provides more
information to paint a more complete picture of your
business at any particular point in time. This information
may include available cash on hand, accounts payable,
utilities, loans, etc.
Your small business should use a double-entry bookkeeping
system if has significant accounts receivable, accounts
payable, equipment that depreciates or inventory. If your
business will meet any of these, you should select a
double-entry system from the start. You’ll use journals
and ledgers to record information that reflect your
business transactions.
Each transaction will be recorded twice, meaning the
system will balance itself out. For example, if you make a
loan payment, you will decrease the cash amount in your
cash account and increase the exact amount in the expense
account.
What Type of Records To Keep
The type of business you operate generally affects the
type of records you need to keep for federal tax purposes.
You’ll need supporting documents to capture important
details, such as your receipts, purchases, expenses,
assets.
Here are some other basic record keeping tips to keep in
mind:
· Daily business records are the best
· Identify source of receipts
· Record expenses when they occur
· Keep complete records on all assets
Remember, good record keeping is essential to the
financial survival of your business. So take the time to
keep good records, so you can run your business
successfully — instead of it running you.
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