RECORD KEEPING

 One key to managing your business, is knowing how it’s done.  Are you making money?  Are you taking advantage of all the business deductions to which you are entitled?  If you learn to keep your business records properly from the beginning, you will have a better understanding of your business, save time trying to remember what you did eight months ago, and save money on accounting fees.  This is not meant to be a guide to everything you will ever need to know about bookkeeping.  The system described is a simple, cash based system.  It is not appropriate for every business.  But for most small businesses it will suffice.

The goal of bookkeeping is keeping track of what you have done.  Your records should provide enough information to help you make business decisions.  From them you should be able to prepare you taxes (or have an accountant do them).  And if you are ever unlucky enough to be audited, your records should be good enough for you to trace through what you claimed on you tax return.

A very simple system:

1.         Open a checking account for your business.  Every business should have one.  It does not have to be a fancy or expensive business account.  For most small businesses, a simple checkbook will be fine.

2.         Set up some kind of ledger.  You need to keep more detail than just your deposits and checks.  Just what you record and how you record it will vary for different businesses.  There are all 

kinds if ledgers available in office supply or stationary stores, or you can make your own using accounting paper with columns.  If you are not sure what categories to use to head your columns, look at the expense categories on the Schedule C form.  Since the records are set up to make it as easy as possible for yourself later.  At the end of each month, add up your columns, make sure things add up correctly.  Subtract you expenses from your receipts to see how things went.

3.         Record all your receipts and expenses as soon as possible.   When you write a check to pay a bill, write the check number and the date on your receipt.

4.         Save all receipts in an envelope or file.  Start a new one each month.  It helps to clip together all receipts of an expense category together with a paper clip.  Our store owner, for example, would clip together all her food receipts for the month, and label the stack with a stick on label marked “food”.  By using this simple labeling system, if there was ever a question on an expense, or if you were audited, it is easy for you to find the receipts in question to prove your case.  In a battle with the IRS over the legitimacy of business expenses the rules are simple. you prove it or you lose it.  If you have any questions on an expense, or have done something unusual, write the information on a stick label and attach it.  You may not remember what you did later.

Of course, you can also use the opposite method of filing.  If you have just a few expense categories, you can keep files of envelopes for the expenses and group the receipts within by the month.  For example, the store owner would have a pile of receipts labeled “June” inside an envelope labeled “food”.  Do whatever works best for you.  Just do it.

5.         If you have employees, you have other things to keep track of - W-2’s, I-9’s, social security, and so on.  You may want to hire a payrolling agency to do the payroll and employee records.  This can be time consuming.

6.         Auto expenses - If you use your car less than 100% for business, you can take the business expense in either two ways.  You can deduct the actual expenses: gas, repairs, insurance, interest, etc.  The alternative is to take 31 cents a mile as an expense.  Each method requires that you keep records of the number of miles that you drive for business (assuming that the vehicle is not used 100% for business).  You will need to keep a log in the car and write down the date, mileage when you began, mileage when you return, and the reason for the trip.  At the end of the month add up all the miles and enter the number somewhere in you ledger (you may want to have a separate page for auto expenses).  If you choose the 31 cents a mile method, you have all you need to know to compute your mileage expense.  If you use the actual expense method you keep records of all the related expenses.  At the end of the year you add up all the expenses.  You calculate what percentage of total miles the car was driven for business.  You can multiply this percentage times all your auto expenses to get your auto expense deduction.  You may only depreciate the car if it is used for more than 50% for business.  More information is contained in IRS publication 917, Business Use of a Car. If you are not sure which method to use, keep records for each and decide at the end of the year.

7.         Does you business have equipment that must be depreciated?  If you do, you must keep proper records.  Depreciation is a complicated topic.  See IRS publication 534 on depreciation, or see an accountant.  Getting expert help may pay for itself in tax deductions you did not know you were allowed to take.

Have questions?  It may save you money in the long run to buy an hour of an accountant’s time in the beginning.  Take you business records, or some information on what you do.  Ask how it is best to keep track of what you need.  Ask another question on these complicated topics.

Reprinted with permission from:

Planning You Small Business by:

B. Necarsulmer. 1993

Record keeping checklist

            Overall

·        Understand the basic financial statements?

·        Use budgets and projections, and review them against actual performance to help understand the business better?

·        See regular (monthly, quarterly) financial statements?

·        Record all transactions daily and post them promptly to appropriate ledger?

·        Keep personal and business funds separate?

·        Employ bookkeepers and accountants who are trustworthy; and have knowledgeable back-ups available?

·        Make certain the records are kept in a safe, fireproof place?

            Minding Your Cash

·        All sales are recorded on pre-numbered forms?  All numbers are accounted for?

·        All sales invoices are checked for price and terms as well as clerical accuracy?

·        A schedule of aged accounts receivable is prepared monthly?

·        Past due accounts are followed up and the reasons for the delinquency are investigated?

·        Someone other than the bookkeeper or accounts receivable clerk is opening the mail and listing all cash receipts before turning them over to the bookkeeper?

·        All checks are stamped “for deposit only” before being turned over to the bookkeeper?

·        The cash receipts journal is updated daily?

·        Cash receipts are deposited daily?

·        Cash receipts are posted to the proper accounts receivable record so that customers are credited?

·        People responsible for handling currency are trustworthy?

·        All disbursements except for petty cash are made by check?

·        A voucher accounts for each disbursement for petty cash?

·        There is a set dollar limit on the amount of petty cash disbursements?

·        All checks are pre-numbered and every one is accounted for?

·        All unused checks are kept in a safe place with limited access?

·        No checks payable to cash are allowed?

·        Bank reconciliation is prepared monthly?