- January 3, 2024
- Posted by: Web Digital Media Group
- Categories: Business plans, Tax Planning
Keeping good records for businesses is important because it helps businesses and taxpayers keep track of their operations, check their income and expenses, and support their expenses when filing taxes.
The law doesn’t specify a particular way to keep records, as long as it clearly shows the business’s income and expenses.
Q. What are some of the business records that can be kept?
For record-keeping, businesses should have a summary of transactions in books like accounting journals and ledgers. These books must show the business’s gross income, deductions, and credits. Additional documents, like sales slips, invoices, and receipts, canceled checks, credit card charge slips, form 1099s, invoices, mileage logs and cell phone records should be kept supporting these entries.
Q. Are soft copies acceptable?
Electronic records are fine as long as they are complete, accurate, and follow the same guidelines as hard copies.
Records must be kept as long as needed for tax purposes. Usually, this means keeping them long enough to support income and deductions until the statute of limitations for the related tax return has expired. The statute of limitations is a time period set by the IRS to review tax-related issues. When it expires, the IRS can’t assess additional tax, allow a refund claim, or take collection action.
Generally, businesses should keep records for at least three years from when the tax return was filed.
If a business has employees, employment records should be kept for at least four years.
Records related to property should be kept until the statute of limitations expires for the year the property is sold or disposed of, plus an additional three years. These figures help calculate things like depreciation, amortization, and deductions.
It’s important to keep business funds separate from personal funds to avoid IRS audits and denials of deductions. Having a separate bank account for business transactions is advisable, and business bills should be paid from that account instead of a personal one.
Two essential financial statements are needed: the income statement, which shows revenue, expenses, and net income or loss over a specific period, and the balance sheet, which gives a snapshot of assets, liabilities, and equity on a specific date. Unlike income statement accounts, balance sheet accounts carry over from year to year.
Common Questions Regarding Recordkeeping:
What is an income statement?
The income statement is also called the profit and loss statement. It indicates the business’ revenue, expenses and net income or loss during a period such a year, month, or a quarter.
What is a balance sheet?
The balance sheet is a summary of a business’ assets, liabilities, and equity on a specific date. A balance sheet provides a snapshot of the business’s financial condition. Balance sheet accounts are carried forward from year to year unlike income statements which are closed out at year end and only reflect business operations within a specified period.