Sunday, August 25, 2019

Records and Record Keeping

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The best time to set up a record system for a small business is before you start the business. Experience clearly indicates that the use of an adequate record keeping system increases the chances of business survival.

Why Are Records Important?

For Management Decisions

Good records help you, the owner, understand how a business is doing. Knowing where you are and where you are going is an important benefit of an accurate record system. Identifying expenditures, earnings, assets and future needs is necessary information for effective business management. Records can help you develop a competitive edge.

Government and Tax Requirements

Records are essential in the preparation of accurate tax returns. The Internal Revenue Service and the State of Ohio require that every business report income, expenses and allowable deductions. Failure to document records may result in paying more tax and receiving less favorable treatment.

Plan for the Future

Over a period of time, your records should reveal a pattern of performance and operation. This “cycle” can help you improve your plan for the future. The information is useful for developing cash flows, scheduling purchases, hiring additional help, etc.

Creditor Requirements

Bankers and lenders require an accurate, realistic financial picture of your business. Many bankers want a net worth statement, profit and loss statement and cash flow projection as part of a loan application. Your records provide the basis for these statements.

What Records Should You Keep?

Income

The money you receive from sales is income. Your records can help identify the source of income. Receipts can be identified using sales slips, cash register receipts, invoices and checking deposit slips. It is helpful to categorize income as received and to keep a separate record of all sales tax collected.

Expenses

All funds paid out should be recorded. Each expenditure should be identified according to its use and whether it is a capital or cash expenditure. In addition to the supplies used, you may have repairs, utilities, labor, fees, interest, insurance and other items that are costs of doing business.

Payroll Records

If you have employees, record keeping is more involved. It is necessary to keep records of payroll payments, including rate of pay; federal, state and local withholding tax; unemployment tax; worker’s compensation; pension plans, etc.

Inventory

The dollar value of the inventory you have on hand is part of your net worth. Develop a system to record inventory. The increase of inventory is part of your income. One important item to remember in a new business is that you may have a greater need for cash income rather than having increases in inventory value. Cash income and reserves are important for the smooth operation of a business.

Description of Equipment and Fixed Assets

Many businesses need equipment, fixtures and facilities in order to function. The use of these items results in a certain loss of value and at some future date they will need to be replaced. This is one of the costs of business operations and must be a part of a complete record system.

Accounts Receivable

This is a listing of who owes you money and for what. A new business cannot afford extensive credit on the books. Thus, a system must be developed whereby money owed to the business can be collected. An aging of accounts record is essential. This means keeping records of when money is due you, for example, two weeks, 30 days, 60 days, 90 days, etc.

Accounts Payable

A record of goods or services received on account or credit is called accounts payable. You must pay for these goods and services, so consider them a cost of business.

Insurance Records

Most businesses need liability and property loss insurance. You will need to keep a record of each coverage, dates effective and annual premiums.

What Makes a Good Record System?

There is no right or wrong system. At the end of the year, you will need an income statement and related information to complete your tax report. How you organize your bookkeeping to provide this information is up to you. If the method you start with gets too cumbersome, find a way to simplify it.

Standardized bookkeeping systems are available from business or stationery stores. A notebook can be used to record income and expenses. Remember that the numbers alone may not be helpful. An explanation of who paid for what item or to whom you paid for an item, etc. and the date or check number are needed. You should keep a separate business bank account. Your bank can help you with these records.

Balancing your books with your bank statement can ensure accuracy. New computer record keeping systems are available for small businesses. If you enjoy working with a computer this may be an asset to you. These systems, however, have a tendency to be more involved than needed by most beginning small businesses. Select a system that will work for your business size and your computer abilities.

For most small businesses, the business checkbook is an important part of the business records. Deposits of income from all sources and payment of bills by check can provide you an audit trail and a check on your own records. Keep records in one place. Develop a regular schedule for recording information, daily, weekly or monthly, depending on business volume. If two or more people are working together, decide who will take the responsibility for keeping the books.

Ordinarily, the statute of limitations for tax records expires three years after the year of filing. However, this three-year period is minimal for many businesses. Many people suggest that basic records such as income tax returns be kept for seven years or longer. Unless your background includes bookkeeping or accounting, you may want to seek outside help in setting up a record system. An accountant can help you determine what records and recording techniques are most useful for your management and for reporting tax information. After the initial consultation, you may need the accountant only when filing taxes or for specific questions.

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