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Why Accurate Records are Important
There are three main reasons why accurate and current records should be kept:
1. Tax Purposes – Accurate records are an important part of completing your business’s end of year tax return. Your company’s books should mirror the sales, other income, overhead and expenses that you report on you annual tax return. For most small businesses, it should not be necessary to keep two sets of books (one based on Accounting Principles and one based on Tax Principles). One set of books kept on a “cash” or “modified cash” basis (where you record receivables, payables, and depreciation) will be adequate. Keeping accurate records are necessary incase there comes a time when you have to show documentation of your income, deductions and credits for an IRS financial audit of your books.
2. Monitoring your Financial Health – Having records that are precise and up to date allow you to complete financial reports quickly allowing you to know the current financial position of your company at any time.
3. Trend Analysis – Too frequently, small businesses owners only run financial reports when required by their lender or for tax purposes. Getting in the habit of running frequent, periodic reports (at least monthly) will allow you to catch and correct detrimental trends in sales and expenses.
Where do I begin?
The first step is to open a separate checkbook for your business. It is a big mistake to try use your personal checkbook for both your business and personal expenses for various reasons. Most small businesses keep their books on a modified cash basis to simplify the process of tax reporting. Once you have a checkbook, only write business expenses from that account. If you need to use the money in your business account for personal reasons write the check out to yourself as an owners draw. This will help keep your business checkbook ledger free of any nonqualified expenses.
Second, take an inventory of all the assets and liabilities in your business. The sooner you do this the better. Trying to go back and value assets purchased years ago can be a daunting task and with every day that passes, that task gets harder and harder. Once you have the itemized list of assets and liabilities, create either a written balance sheet or enter the data into your financial accounting software.
Keeping Books Electronically
Both QuickBooks and Peachtree offer excellent programs for day to day financial accounting. For most start-up Businesses the basic editions will be adequate for record keeping. If necessary, hire an accountant or bookkeeper to set up your accounts and walk you thorough basic entries or you can attend local Peachtree training or local QuickBooks training events near you.
A few caveats about QuickBooks and Peachtree:
· The standard versions of both software have only adequate inventory management systems - If your business requires you to track the manufacturing process (from raw materials to work in process to finished goods) then you should consider Peachtree for Manufacturing or look for an inventory management program that is specific to your industry and its needs. Also, if you are in the retail business with hundreds or thousands of unique products there are excellent point of sale programs that work in conjunction with your financial accounting software, such as QuickBooks POS that are better suited for inventory management.
· Bone up on principles of accounting – There are thousands of accounting rules that affect the record keeping process for your business. While it is not imperative that you understand all of them there are a few that are essential to keeping accurate records.
1. Understand the difference between an asset and an expense. Assets must be depreciated over their useful life while expenses can be written off immediately. Allow your accountant to handle the depreciation schedules for tax purposes. Simply book the appropriate purchases as assets.
2. Know what is tax deductible and what is not. For example, owners salary is only deductible in C-Corporations and Subchapter-S Corporations. Another example, only the interest portion of your monthly loan payment is deductible, the principle portion simply reduces the loan balance.
3. If you have employees either a) have a payroll accountant walk you through the process of tax deductions for your employees paychecks and remitting quarterly withholding for the first few months or b) hire a payroll service. Too many businesses have failed because of underpayment of payroll taxes. Typically the penalties and fees for such a mistake can put you out of businesses.
· The financial reports generated are only as good as the information that is input into the program. Your software can only do what it is told. As many accountants will attest, the financial statements for young companies often require hours of time and effort just to create usable statements. The more detail you provide through the notes and memo line for each transaction the easier it is to go back and make adjusting entries. Once your books are set up it is best to simply use the program as a checkbook register. If you don’t know how to classify an expense, create an “other expense” account and make detailed notes on the purchase so that at reporting time you can go through them one at a time with a qualified accountant.
The Daily Grind
The most important thing to understand about record keeping is to do it frequently. Daily recording of income and expenses would be ideal but we do not live in an ideal world. At least weekly set aside a few hours to make entries, reconcile your account balances and monitor the financial health of you company. Most business owners find it helpful to keep an accordion file, with a slot for each week or month, in which to keep their deposit slips and receipts.
Monthly, print reports and analyze the financial results of the last 30 days and compare them to past results and budgets. A useful tool for business owners is common sizing your financial statements by dividing each line item on the income statement into Sales and each line item on the balance sheet into total assets. This allows you to gauge how each account balance is moving in relation to a single number making it easier to compare of two or more periods with completely different results. Finally, look at short-term and long-term trends, especially in your key accounts such as Sales, Cost of Goods Sold, Employee Wages, and Operating Profit.
The Bottom Line
Keeping accurate and timely records is a struggle but if you devote the same time every week to complete the task it will reward you with easy & confident tax preparation at the end of the year and the comfort of knowing the financial health of your company at all times.
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