Record Keeping for Small Business

In addition to complying with Internal Revenue Service (IRS) record keeping requirements for taxation purposes, a small business can benefit from a thorough record keeping system because the owners determine the best use of their business dollars. By compiling all of your business income and transactions, you create a detailed picture of your financial health.

Function

Your record keeping system should be easy for you to understand. Documenting your transactions will establish a clear picture of your current profit and future profit potential. Good record keeping determines how much inventory you're holding, which products or services are most lucrative and how to figure your net worth, cash flow and profit margin.

Types

Instead of a general journal or ledger, many businesses choose bookkeeping software that allows them to set up an initial chart of accounts and then enter only the individual transactions. The software cross-references income, expenses and other financial data and compiles financial documents, such as income statements, profit and loss statements and net worth reports. These programs will even predict future profits, based on past performance. (See Resources.)

Identification

Small business owners know they must keep certain records in order to file their income taxes. The IRS insists that you keep an accounting of all the cash that comes into your business from any source. However, this is not the amount used to figure your tax liability. You need to also keep detailed records of every deductible expense you pay. These expenses will lower your tax burden. Keep your bank deposit slips, cash register records, copies of invoices sent and received and all other evidence that money came in or went out of your business. In addition, you must keep income records, such as W2 forms and 1099 forms.

Considerations

You may have to keep additional records if you pay worker's compensation insurance or if you have a commercial liability insurance policy. Insurance agencies reserve the right to audit your worker's compensation and insurance liability records to determine whether subcontractors are working on your job site or at your business location without proper insurance on their employees. If this is the case, you must collect proof in insurance from every business that operates on your property.

Potential

A good record keeping system gives the maximum amount of allowable deductions when filing your taxes. Most businesses take their tax information to a certified tax accountant at the end of the year. Your accountant charges for the time he spends preparing your taxes. Ask your accountant about a bookkeeping program that you can use to easily transfer your data to his master accounting program. Your accountant saves time and you save money.

Resources

• Compare small business bookkeeping software programs.
• Try a free version of QuickBooks from Intuit.
• Download IRS Publication 538, record-keeping compliance.