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Keeping New Business Bookkeeping and
Taxes in Order
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Keeping your business books and taxes in order when
starting a new
small home business or gift basket
business.
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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.
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Determine if You will Wear the Hat of
Bookkeeper for your Business or
if you want to hire a
Business Accountant.
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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.
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Owner's Review Checklist
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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 else's
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. |
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Ways in Which an Accountant Can Help
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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 advisor 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 breakeven analysis.
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Basic Types of Business Records
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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.
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Income
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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
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Purchases & Direct Expenses
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You need to keep
records that support the materials and supplies
for your products and services. Examples
include:
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- Vendor Invoices
- Cancelled checks
- Cash register receipts
- Credit card charges
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Indirect Expenses
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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
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Assets
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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
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Internal Revenue Publication 583 -
Starting a Business and
Keeping Records available as a .pdf.
This guide is an excellent 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. |
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Retention of Business Records Guide
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Category: |
Time:
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| 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
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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
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| Contracts,
mortgages, notes, and leases (expired) |
10 years |
| Contracts,
mortgages, notes, and leases (still in effect)
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Permanently |
| Correspondence
(general) |
2 years |
| Correspondence
(legal and important matters only) |
Permanently |
| Correspondence
(routine) with customers and/or vendors
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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
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10 years |
| General/private
ledgers, year-end trial balance |
Permanently |
| Insurance policies
(expired) |
3 years |
| Insurance records,
current accident reports, claims, policies, etc.
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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
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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
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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
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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
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10 years |
| Tax returns and
worksheets, revenue agents' reports, and other
documents relating to determination of income
tax liability |
Permanently |
| Time books/cards
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10 years |
| Trademark and
copyright registrations |
Permanently |
| Training manuals
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Permanently |
| Union agreements
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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)
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10 years |
| Withholding tax
statements |
10 years |
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