RecordKeeping and Taxes

Why RecordKeeping is So Important

There are rewards for those who take the time to plan, organize and maintain business records. If you do not keep records, how will you know if you business is operating at a profit or loss? Some of the advantages of good record-keeping include:

*Tracking the progress of your business. Financial information is basic to decision making. Maintaining income statements and balance sheets will allow you to determine the future growth of your organization.

*Supporting IRS tax returns. There are many tax breaks available for small businesses. Good record-keeping enables you to take advantage of these tax breaks. For example, small business owners are often eligible for a vehicle expense deduction. If you document usage by keeping an accurate mileage log, you may claim 31 cents a mile against your taxes as an expense of doing business. (Check IRS Publication 17)

*Determining the best use of resources. Maintaining files of business transactions associated with producing your goods or services can reveal what materials are most cost effective, what vendors are reliable and economical.

*Providing quality service to clients and business associates. Suppliers, bankers and customers are all affected by the ease with which they can transact business with you. Problem resolution, efficient order processing and prompt payment of bills progress smoothly with a good record-keeping system.

RecordKeeping for Taxes

If you are taking business tax deductions, the law requires that you keep records for income tax purposes. Good record-keeping is a must in case of an IRS audit. The IRS offers some suggestions:

*Permanence. Consistency in reporting is necessary for comparing business from year to year. Keep documents on file that verify the date your business began and your fiscal year calendar.

*Accuracy and Completeness. A system should accommodate all transactions conducted in your business.

*Documentation of Business Activities. Income deduction claims and tax credits should be clearly established by your records. Logbooks, checking account information, receipts, ledger or journal entries are appropriate.

Setting Up a Record-Keeping System

It is recommended that you start doing the bookkeeping yourself. One the business expands, you may want to hire a bookkeeper. The record-keeping system that you set up for your business should be simple for you to use. You should spend some time researching recordkeeping techniques. There are two primary methods:

*Single Entry Method: This method is handled much like a checkbook. An entry is made into a journal each time the business receives or disburses money.

*Double Entry Method: This method requires the owner to prepare a list of accounts (office supplies, banking charges, materials, etc.). A log of every transaction is maintained in a journal and a record of the transaction is summarized by an account in another record book. Although this method is time consuming, it is more accurate than the single entry method.

After you decide which type of system is best for you, visit your local office supply store and to purchase required record-keeping forms such as the Sales Slip, Customer Account Forms, and Customer Billing Forms.

*Business Checkbook: Never combine your personal account with your business account.

*Cash Receipts Journal: Use this journal to record money coming in.

*Cash Dispersements Journal: Use this journal to record money going out.

*Accounts Receivable Journal: Use this journal to record money owed to you on credit.

*Accounts Payable Journal: Use this journal to record what you owe to creditors and suppliers.

*Petty Cash Fund: This is Used to document small expenditures.

Financial Statements

*Statement of Financial Need: This form will show the total cash you have on hand, your total estimated expenses and how much you will need to borrow over a certain period of time.

*Cash Flow Analysis: This financial statement is a budgeting tool that shows cash inflows and outflows over a period of time. Follow the cash flow of your business on a daily basis and then a monthly basis.

*Profit and Loss Statement: This statement looks at your business over time. It shows the amount earned, how it was spent and whether a profit or loss resulted.

A Profit and Loss Statement

Month           

Net Sales                                               
       
                 
Expenses
Salaries                        
Advertising                        
Office Supplies                   
Telephone                           
Utilities                               
Other                               
Total Expenses                                       
            

Net Income                                              
         
                          

Conclusion
Record-keeping is essential to your success as a small
business. 
For more information, consult your local community college or the
Small Business Technology and Development Center in your area. 

References:  
Adapted from Entrepreneurship:  Growing Success from the
Ground
Up (Western NC Entrepreneurship & Heritage Skills
Education
Committee of the NC Cooperative Extension Service) by Davina
Hickman, Family and Consumer Agent, North Carolina Cooperative
Extension Service, 1996

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