As a small business owner, you should have a plan in place for keeping records. Also, you need to determine how you will handle your accounting systems. The information below will help you determine what options are best for your business.
For new businesses an adequate recordkeeping system helps increase the chances of survival and reduces the probability of early failure. For established businesses, an accurate recordkeeping system increases the chances of staying in business and of earning large profits.
Negotiating for a business loan or securing credit in any form from a bank requires properly prepared financial statements. Bankers and other credit grantors need to study the business owner’s balance sheet and income statement in order to decide whether credit should be extended. Sometimes audited financial statements are required; the recordkeeping system must provide the basis for these statements.
Requirements by federal and local government agencies of adequate records are as important as the management and credit importance of financial statements. The responsibility for maintaining records and proving their accuracy falls on the taxpayer. Federal and local income taxes, payroll taxes, sales taxes, personal property taxes, and an increasing number of other laws and regulations require certain reports which are easier to prepare and substantiate if the figures are organized by a good recordkeeping system.
Records that back up government requirements must be available during the audit period. Record retention will depend upon the statute of limitations set forth by local and federal law. It is important to consult an attorney to determine the requirements of governing statutes. Due to the cumulative volume of required records, storage and retrieval can become burdensome. Many business owners are utilizing document scanning and electronic storage services to solve this problem.
A number of “one-book” recordkeeping systems are available. Some are prepared with instructions and forms designed for specific kinds of businesses, while others are for small business use in general.
Some trade associations, manufacturers, and wholesalers offer specially designed recordkeeping systems to meet the general needs of a large variety of retail and service establishments. The owners of a business will often find it desirable to obtain specialized assistance to help them adapt such systems to their special requirements.
There are several copyrighted systems providing simplified records, usually in a simplified record book. These systems cover the basic records with complete instructions for their use. Find a list of these systems in “Record Keeping in a Small Business,” published by the Small Business Administration (SBA)
In order for a recordkeeping system to be useful it must be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis.
Effective record keeping includes:
- Identifying the source of a receipt
- Keeping track of all deductible expenses
- Figuring depreciation allowance
- Taking advantage of capital gain and loss laws
- Figuring your earnings for self-employment tax purposes
- Supporting items on your tax returns
There are four basic types of records that most firms keep:
- Sales records
- Cash records
- Cash disbursements
- Accounts receivable
Consider hiring a certified public accountant to develop your recordkeeping system. Public accountants also render other accounting services such as auditing, preparation of reports for government agencies, tax planning, analysis of financial reports and a variety of specialized management advisory services.
Accounting systems range from simple and inexpensive to costly computerized· systems. Some of the available options include the one-write system, a ledger-less system for accounts receivable and accounts payable, standard ledgers and journals, computerized accounting systems, prepackaged services provided by banks and service bureaus, bookkeeping services and accountants. With this wide variety of options it is important to choose a system that you can understand and feel comfortable using.
A business’ accounting system should meet the needs of the business situation and meet the following minimum objectives:
- The system should yield an accurate and precise picture of the operating results
- The records should provide a convenient basis for comparing current data with previous year’s operating results and budgetary goals
- The financial data should be presented in a format that is useful to prospective creditors, bankers, auditors and management
- The accounting records should reflect losses such as theft and bad debt
- The accounting process should include compiling and filing reports and tax returns
- The accounting records should be able to substantiate the value of fixed assets for insurance claims, in the event of a loss
- The United States Securities & Exchange Commission requires most publicly held corporations to file certain annual and interim quarterly reports
Accounting systems can be established on an accrual or cash basis. In a cash system the accounts are debited and credited as cash is received and paid out. In an accrual system, the income earned and the expenses incurred are recorded when the sale is made or whenever the expense is incurred. The accrual basis of accounting allows the matching of revenues and associated expenses. Due to this matching, the accrual basis is generally considered to be a more accurate and up-to-date statement of profits.