Small Business Owners Guide To Record Keeping

What is small business recordkeeping?

Recordkeeping is the orderly and disciplined practice of storing business records. Business success depends on creating and maintaining an effective record system.

Effective recordkeeping is one of the most important responsibilities of any small business owner and is applicable regardless of the following:

• Number of employees
• Type of services provided
• Period of operations
• Financial status
• Entity type (i.e., sole proprietorship, partnership, limited liability corporation, C corporation, or S corporation)

Recordkeeping assists owners with key business functions:

1. Monitoring business progress

Records provide important financial and nonfinancial information, including sales trends, changes in costs, and customer complaints. Owners and managers can use records to evaluate business progress and determine any changes that should be made.

2. Prepare financial statements

Records allow for the preparation of accurate financial statements, which are important documents to help a small business owner work with a bank or creditors.

Please note that small business recordkeeping not only facilitates regulatory compliance but also provides owners with relevant and timely information to help in making good business decisions.

There are three fundamental financial statements that small business owners need to be mindful of. These are:

• Income Statement

This shows the income and expenses of the business for a given period of time.

• Balance Sheet

Provides a listing of the small business assets, liabilities, and equity on a given date.

• Cash Flow Statement

This shows cash generated from day-to-day operations, cash used for investing in assets, proceeds received from asset sales, and cash paid or received from issuing or borrowing funds.

Good record keeping helps the small business owner identify the source of income. It allows the business owner to track the receipt of cash and other assets in-order to appropriately classify the receipts and determine the tax consequences.

Also, the business owner can track deductible expenses. Good recording keeping by the small business owner allows for the identification and support tax deductible expenses using invoices, cash payments or other purchasing records.

Good record keeping is very important when tracking the basis of assets. Records help the small business owner in the determination of basis to figure the gain nor loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.

Just to clarify, basis is the amount of the investment in property for tax purposes.

In the preparation of tax returns, proper record keeping is crucial. Records provide owners with the information needed to appropriately prepare tax returns and related filings.

Proper record keeping also supports items reported on tax returns. In the unfortunate event of an audit or examination by the Internal Revenue Service (IRS), proper  record keeping allows for accurate and reliable information to be provided.

To learn more, schedule your no cost consultation below to ensure you’re keeping good records.

User | 29/11/2021