There are two reasons to keep records of your business: they’re required by law, and they’re useful to you as a manager.
Records must be kept to work out the tax liabilities of your business. The records must be permanent, accurate and complete. They must also clearly show income, deductions, credits, employee information and anything else required by federal, state and local regulations. All business records must be kept for a minimum of 5 years for tax purposes.
From a managerial standpoint, maintaining accurate records is vital to the day-to-day operation of your business. Information about the financial condition of your business helps you identify and correct any income or expenditure problems before they get out of hand.
When developing a record keeping system, your goal is to keep it as simple as possible so you save time and eliminate the need to hire an accountant or bookkeeper. There are two basic types of records that you are required to maintain: the Sales Records and the Operating Expense Records.
Sales records include all income derived from the sale of products or the performance of services. They may be grouped into one large category called gross sales, or divided into several sub-categories of different types of services or products. This record will help you to know what’s doing well and what isn’t.
Operating Expense Records
Operating expense records are sometimes referred to as disbursements or accounts payable. All disbursements should be made by cheque, if possible, so that business expenses are well documented for taxation purposes.
If a cash payment is necessary, a receipt for the payment, or at least an explanation of it, should be included in the business records. For GST purposes, you will need a “tax invoice”. All cancelled cheques, paid bills and other documents which substantiate entries in the business records should be filed in an orderly manner and stored in a safe place. Breaking the cash disbursement headings into different categories such as rent, maintenance and advertising simplifies expense records.
All relevant documents for the purpose of proving taxable income and expenditure and documents containing particulars of any election, estimate, determination or calculation of your taxation commitment must be kept. Under the self-assessment system, these documents do not have to be lodged with tax returns but should be available if the Tax Office conducts an audit. Again, all records must be kept for 5 years.
A computer will effectively maintain basic business records. There are numerous computer software programs available, such as MYOB or Quicken that can effectively record the daily transactions of a business and keep your books in order.