Keeping the Business Books and Taxes in Order

Keeping your business books and taxes in order when starting a new small home business or gift basket business.

Do I have to do this? There are various levels you can work towards in your bookkeeping system. Someone needs to do it. Period. That need not be you. In fact, if you have trouble working with numbers, or simply won’t have the time, it should not be you because you’ll never get to it.

You can spend less than an hour per day using a simple software program such as QuickBooks, then when necessary, print out the reports and hand over to an Accountant. It’s very affordable to hire a local bookkeeper / accountant to prepare and file your interval taxes. If you’ll be operating as a home business, there are many deductions you can claim, and a certified bookkeeper can give you a defined list of what is legally deductible as a business expense – a bookkeeper will make your life easier.

Determine if You’ll Wear the Hat of Bookkeeper for your Business or
if you should Hire a Business Accountant.

If you’re not going to be doing the actual bookkeeping and taxes for your business – you as principal owner of the company need to understand the system, even if you’re not the one doing it. Also, if you hire someone else to do the basics for you, make sure you have some checks and balances in place.

If you’re experienced in accounting and choose to do the bookkeeping yourself, be prepared to devote the same eye for detail to your record keeping as you do to your gift basket designs.

Owner’s Review Checklist

Even if you hire someone to do your accounting and bookkeeping, there are a number of items you as the business owner should do periodically. Many small businesses have suffered serious losses when the owner lost track of the numbers and the trusted bookkeeper “borrowed money” and left for an extended cruise. The following checklist will keep you in touch with your business, and perhaps even prevent you from serious losses.

1. Compare actual results to budget. Each and every month you need to compare your income and expenses to your budget. This review is perhaps one of the most important tools for a small business owner. It’s a great way to learn what’s working and what’s not working with your business. The goal is not to have an accurate budget… but for you to have a thorough knowledge of what is happening and to know if anything unexpected is happening so that you can adjust your actions in a timely manner.

2. Scan the check register. Periodically (every 3-4 months) you should take a look at the check register just to make sure all the payees are familiar to you. Multiple checks written around the same time to the same vendor could be an indication that funds are being diverted. (You also might want to reduce the time spent writing and posting multiple checks.)

3. Review the bank reconciliation. This should be done on a monthly basis (or if you skip a month take a look at all the reconciliations since your last review.) This step is important, particularly if you have one person doing all the bookkeeping: writing checks, posting entries, preparing financials, etc. Look at any adjustments to the bank accounts, stale items, etc.

4. Look at canceled checks. Occasionally (1-2 times a year) pull out a bank statement and flip through the canceled checks making sure that all those signatures are yours, that you recognize the vendors and scan the endorsements on the back. Obviously, this can’t be done if you don’t get your canceled checks back from the bank. In this case you might want to spend a little extra time with the check register.

5. Review statements from vendors. Every now and then (3-4 times per year) take the time to open the mail and look at statements from vendors (many vendors have stopped sending statements, but they will send late notices). Here you want to make sure that your business is in good standing with vendors — long overdue invoices might be an indication that a check you thought was going to a vendor actually went in someone elses pocket, or that an invoice has been overlooked.

6. Review Payroll register and handout the paychecks. Now of course this isn’t an issue for a business with only 1-2 employees. But “padding the payroll” is a common problem in some industries – such as construction or cleaning services where it is common for the crew to go straight to the jobsite and perhaps not come into regular contact with the owner.

7. Review your Accounts Receivable and aging. This needs to be done on a regular basis. Of course you need to know if you have any slow paying customers and a periodic review would also disclose any scheme of “misapplying” customer payments.

8. Take a physical inventory. Many small businesses have very poor inventory records, so if you have a large amount of inventory or a high volume business, you probably will want to work with your accountant and get some type of perpetual inventory system set up. Again, there are some excellent software packages available for the small business that will make this process relatively painless. Once you have a system in place, you should take a physical inventory at least once a year and compare the actual goods on hand to the inventory records.

Ways in Which an Accountant Can Help

The majority of small business owners will need the services of an accountant. Even owners with accounting backgrounds will need help from time to time. Its challenging enough to run the business, much less keep up with tax or benefit law changes.

Here are a few ways in which an accountant can assist your business:

• Prepare periodic financial statements and annual audit reports.
• Assist you in analyzing your financial statements, looking for problems or opportunities for improvement.
• Determine working capital and cash flow requirements.
• Help you develop a budget and setup system for your monthly review of budget vs actual results.
• Prepare tax returns and assist with tax planning.
• Establish tax calendar for you and set up system to help you comply with the myriad filing requirements.
• Help set up your accounting systems, including computer based systems.
  Assist with determining loan or capital requirements.
• Act as your adviser and sounding board in financial and administrative matters.
• Perform operational reviews and help you find ways to run more efficiently.
• Determine product and customer profitability analysis and break-even analysis.

Basic Types of Business Records

For a small business, the business checkbook is the main source for entries into your accounting system. But what else do you need to keep? Although, there are no legal requirements, you will need to keep sufficient records to support your tax returns.

Income
You need to keep records that support the amounts and sources of income.

Examples include:
Invoices
Deposit slips
Cash register tapes or files
Credit card charges
Receipt books

Purchases & Direct Expenses
You need to keep records that support the materials and supplies for your products and services.

Examples include:
Vendor Invoices
Cancelled checks
Cash register receipts
Credit card charges

Indirect Expenses
You need to keep records that support overhead and other costs of doing business.

Examples include:
Vendor Invoices
Cancelled checks
Cash register receipts
Credit card charges
Petty cash system

Assets
You must keep records for the property and equipment you use in the business.  Information to support the depreciation expense or any gain or loss if you sell the asset includes:

Invoices, closing statements
Cancelled checks
Costs of improvements
Depreciation records

See: Internal Revenue Publication 583 –Starting a Business and Keeping Records available as a .pdf.

This guide is useful resource for those starting a new business. In addition to basic federal tax information for starting businesses, it contains record keeping tips, a sample record keeping system, including sample forms.

Retention of Business Records Guide

Some paperwork and records you can toss in a couple of months – others are required to be retained for a certain number of years.

Accident reports/claims (settled cases), 10 years
Accounts payable ledgers and schedules, 10 years
Accounts receivable ledgers and schedules, 10 years
Audit reports, Permanently
Bank reconciliations, 2 years
Bank statements (see also “cancelled checks” below), 3 years
Capital stock and bond records: ledgers, transfer registers, stubs showing issues, record of interest coupons, options, etc. , Permanently

Cash books, Permanently
Chart of accounts, 10 years
Checks (canceled – see exception below), 10 years
Checks (canceled – for important payments, i.e. taxes, purchases of property, special contracts, etc. Checks should be filed with the papers pertaining to the underlying transaction.),  Permanently
Contracts, mortgages, notes, and leases (expired), 10 years
Contracts, mortgages, notes, and leases (still in effect), Permanently
Correspondence (general), 2 years
Correspondence (legal and important matters only), Permanently
Correspondence (routine) with customers and/or vendors, 2 years
Deeds, mortgages, and bill of sale, Permanently
Depreciation schedules, Permanently
Duplicate deposit slips, 2 years
Employment applications, 3 years
Employment tax returns, 4 years
Expense analyses/expense distribution schedules, 10 years
Financial statements (year-end other optional), Permanently

Garnishments, 10 years
General/private ledgers, year-end trial balance, Permanently
Insurance policies (expired), 3 years
Insurance records, current accident reports, claims, policies, etc., Permanently
Internal audit reports (longer retention periods may be desirable), 3 years
Internal reports (miscellaneous), 3 years
Inventories of products, materials, and supplies, 10 years
Invoices (to customers, from vendors), 10 years
Journals, Permanently
Minute books of directors, stockholders, bylaws, and charter, Permanently
Notes receivable ledgers and schedules, 10 years
Option records (expired), 10 years
Patents and related papers, Permanently
Payroll records and summaries, 10 years
Personnel files (terminated), 10 years
Petty cash vouchers, 3 years
Physical inventory tags, 3 years
Property appraisals by outside appraisers, Permanently

Property records, including costs, depreciation reserves, year-end trial balances, depreciation schedules, blueprints, and plans, Permanently
Purchase orders (except purchasing department copy), 1 year
Purchase orders (purchasing department copy), 10 years
Receiving sheets, 1 year
Retirement and pension records, Permanently
Requisitions, 1 year
Sales commission reports, 3 years
Sales records, 10 years
Scrap and salvage records (inventories, sales, etc.), 10 years
Stock and bond certificates (canceled), 10 years
Stockroom withdrawal forms, 1 year
Subsidiary ledgers, 10 years
Tax returns and worksheets, revenue agents’ reports, and other documents relating to determination of income tax liability, Permanently
Time books/cards, 10 years

Trademark and copyright registrations, Permanently
Training manuals, Permanently
Union agreements, Permanently
Voucher register and schedules, 10 years
Vouchers for payments to vendors, employees, etc. (includes allowances and reimbursement of employees, officers, etc. for travel and entertainment), 10 years
Withholding tax statements, 10 years