It’s important to learn good recordkeeping skills, so that you always have any necessary documentation on hand when you need it. If you put a little time and effort into keeping your business’s books up to date and honestly entered, you’ll save yourself a lot of stress down the road.
The best way to keep all your records up to date is by using good accounting software.
Records you need to keep
You need to hold on to anything that’s related to your income and expenses. These are the records your accountant is going to ask for as proof of your business operations, because that’s what the IRS and uses to decide how much to tax you.
When it comes to tax season, you’ll work through the documentation with your accountant, but to make the process run efficiently, you need to have the following on hand:
- Income receipts – these illustrate the income your business receives. Things like bank deposits, mobile and online payment records, cash register tapes, receipt books and invoices are all examples of proof of income.
- Purchases – these show what you’ve bought and then resold to customers. You need to keep check butts, credit card receipts, invoices or other documents that show who you paid, and how much.
- Expenses – these are all your other costs, not related to purchases. They include things like rent, power, internet and telephone. You need to keep all documents that show who you paid, and how much, including petty cash slips for small cash payments.
- Other expenses – if you travel for your business, or entertain clients, purchase gifts or donate to charity, you need to provide proof so that you can claim on them.
- Assets – these are things you own and use for your business, like computer equipment, machinery, vehicles, furniture etc. For depreciation purposes, you need to be able to show when and how you purchased the assets, the purchase price, the cost of any improvements you’ve made, what the asset is used for and how much you got for it if you’ve sold it.
- Employment records – since you’re just starting out, you probably don’t have any employees yet, but if you do hire, you need to keep all records relating to their employment.
How long to maintain records
The length of time you need to keep business records really depends on what the records are. There are different periods of limitations for different tax records, but in general terms you should keep business records from between 3 – 7 years.
Your accountant will help you determine which records you can discard, but generally speaking it’s not a good idea to get rid of anything in a hurry. You may need them for reasons unrelated to the IRS, like your insurance company.
Accounting software – why you need it
Good accounting software will save you a huge amount of time, stress and money. It used to be that small business owners toiled over their payroll, invoicing, tax returns and other accounting tasks during long nights and weekends.
If you have accounting software that does it all for you, you’re eliminating the need to sweat over records for hours on end, and your accountant will definitely thank you for it. Among the many benefits are:
- Tax returns – the software will tell you what you need and when you need it. As long as you’re using software that your accountant also uses, then sending them your records is a simple process. Make tax filing and payment easy by using the right software to file and pay what your business owes online. You’ll be able to reconcile your bank statements to accounting data, meaning less chance of errors creeping in.
- Invoicing – rather than allowing orders to accumulate, un-invoiced and unpaid, until you have time to deal with invoicing, accounting software means you can enter details quickly and efficiently – and most of all, on time.
- Government regulations – if you have software that is fully compliant with the necessary regulations and standards, you can be sure that all your records are up to date and accurate. As regulations change, the software is updated automatically in the background.
- If you’d rather work more efficiently, get paid faster, and comply with a host of regulations, including staying on the right side of the IRS, you’ll want to look into automating these tasks with accounting software. There are lots of review websites that rank accounting software products.
Quite apart from keeping the IRS happy, there are other good reasons to be diligent in your recordkeeping, such as:
- Tax returns – when you send your financial statements to your accountant to prepare your tax return, they’ll want to know the documentation is accurate and up-to-date.
- Deductible expenses – if you don’t keep track of them, you may miss out on claiming for them later.
- Business growth – good recordkeeping means you can monitor the progress of your business and ensure you’re staying on track.