06 Jun Recordkeeping – Why You Should Keep Good Records
Recordkeeping is not the most fun task, but keeping good records is vitally important. It doesn’t use the talents and skills you deploy in running your business, and it takes time and effort away from your business activities. Recordkeeping for business isn’t optional. The IRS requires you to keep books and records for your taxes, and various government agencies require records for employees. But even if it’s not fun and you have to do it, recognize that recordkeeping is a vital way to stay on top of what’s happening in your business. Additionally, good recordkeeping can translate into increased profits and avoid problems.
The success of your business depends on creating and maintaining an effective record system, whether your business is a sole proprietorship, partnership, or corporation. Record keeping ranges from simple manila folder filing systems to complex on-line electronic systems. Whether simple or complex, a record keeping system must be easy to use and provide adequate storage and retrieval of records. Most importantly, the record keeping system you choose must be suited to your particular business needs. The type, size, and complexity of your business, as well as your business’ available resources, will help to determine the record keeping system best suited to you and your business.
Basic records include:
- Business expenses
- Sales records
- Accounts receivable
- Accounts payable
- Customer list
- Vendors
- Employee information
- Tax documents
- Invoices
- Purchase orders
- Receipts
- Banks statements
- Contracts
Keeping these records will help you:
- Know how much money to invest to create your product or service
- Set pricing
- Compare budgeted amounts to actual costs
- Track spending
- Make wise decisions about purchases
- Prepare for tax time
- Access customer and employee information easily
- Protect your business in the event of an audit or employee issue
- Calculate expected profit
Why You Should Keep Good Records
You must keep certain records for tax purposes, but this can work to your advantage. Good records enable you to take every tax break to which you’re entitled. Without such records, you may lose out on legitimate deductions. For example, if you don’t maintain a required log—via a written record or app—with crucial information when you drive your personal vehicle for business, you can’t deduct the cost of this driving. This is true even if you want to use the IRS standard mileage rate and know how many miles you’ve driven for business.
Record Retention
We talked about why good recordkeeping is important, but how long should you retain those records? Record retention is the practice of keeping business and personal records over time. Good record retention is in the best interest of companies. A poor system of retention will prevent managers from retrieving information needed to make sound business decisions. A poor record keeping retention system also poses a security risk.
The Internal Revenue Service (IRS) determines some record retention guidelines. Other retention requirements are legal in nature, such as what may be required by contract with those you do business with. Expert recommendations vary. Also, retention schedules vary by region. For example, a state may have a different statute of limitation for legal liability (law suits). Check with your attorney for legal requirements. Check with your accountant for financial-related requirements.
- The Equal Employment Opportunity Commission (EEOC) requires employers to keep employment records for one year.
- The Fair Labor Standards Act (FLSA) requires payroll records be kept for at least three years (two years for job evaluations, wage rates, and more).
- The Age Discrimination in Employment Act (ADEA) requires payroll records, including employee benefit information, to be kept for at least three years.
- These records need to be kept for at least four years for federal employment tax purposes.
Recordkeeping Tools
Manual or Computer based? Sometimes, the simplest system is the best, especially when first starting out. Owners of smaller business ventures often opt for a manual record-keeping system. For a lot of folks — particularly part-timers and business owners who have just opened their doors — the pencil and paper method is adequate. Some businesses grow out of the manual system, but others (like independent contractors and freelancers) may find that the manual system works just fine for the long run, too.
There are a few traditional ways to manually keep small business records.
- Preformatted record books. Inexpensive, preformatted record books are available at most office supply stores.
- Ledger sheets. Ledger sheets (also available at office supply stores) are columnar pads of paper, usually light green in color.
Either way, you must keep a record of each expense — jotting down a brief description of the business expense, the date incurred, the amount, and to whom it was paid. On the profit side of the equation, you must also keep similar records of any income your business receives.
Computerized Record Keeping
Keeping your business’s records on a computer follows the same principles as a manual system, except the computer automates the process so it’s faster and more accurate. Quick Books is a simple-to-use software program and eliminates the need for a handwritten set of books. You input each transaction (whether expense or income) into the software program and assign a category to each — whether a descriptive word like “advertising” or a number code such as “201.”
Audit Trails
An audit trail is a collection of documents that validate the transactions you record in your accounting books. Audit trails also demonstrate your records are valid. Audit trails prevent fraud, helps auditors, enhance accuracy and can help find lost transactions. Whether you store audit trail documents in a filing cabinet or electronically, you need to keep your records organized. That way, you can locate and view documentation from an accounting transaction at a moment’s notice.
Everyone in business must keep records. Keeping good records can increase the likelihood of business success.
If you are just getting started in business, this is a great publication by the IRS to help you get familiar with the practice…
Starting a Business and Keeping Records
Publication 583 (Rev. January 2021) (irs.gov)
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