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the small business resource center

Accounting & Record Keeping

There are obvious reasons for maintaining good records and books for your business. First and foremost, it’s the law. In addition, your banker or lender requires adequate and complete financial statements. Good records are also useful to you as the manager. They provide an overall summary of how your business is doing and detail specific items in your records to identify issues and opportunities. You must keep records to determine the tax liabilities of a business. The records must be permanent, accurate and complete, and they must clearly establish income, deductions, credits, employee information and anything else specified by federal, state and local regulations. When you start your business, establish the type and arrangement of books and records most suitable for your particular operation, keeping in mind applicable taxes and when they fall due.

Accounting Methods

There are two types of accounting systems commonly used for record-keeping purposes:

Cash Basis

You do your business and pay taxes according to your cash flow. In other words, revenue is reported when cash is received and an expense when cash is paid.

Accrual Basis

Under this method, income and expenses are charged to the period to which they should apply, regardless of whether money has been received. In accrual basis, it doesn’t matter when you receive or make actual payment. Income is reported when you bill. Expenses are deductible when you are billed, not when you pay. Under certain circumstances, the IRS requires you use the accrual method. The accrual method provides more information but is more involved and difficult than the cash method. For this reason, most individuals and many small businesses choose the cash method. The most important thing to do when determining whether to use the cash or accrual method is to get the professional advice of a certified public accountant (CPA).

Record Keeping

When you develop a record-keeping system, keep in mind that it must be simple to use, easy to understand, reliable, accurate, consistent, and designed to provide information on a timely basis. There are four basic types of records your business will generate and you will need to track.

Sales Records

They include all income derived from the sale of products or the performance of services.

Cash Receipts

They account for revenue generated through cash sales and the collection of accounts receivable.

Cash Disbursements

Often referred to as operating expense records or accounts payable. All disbursements should be made by check so business expenses can be documented for tax purposes.

Accounts Receivable

These are sales stemming from the extension of credit. These records should be maintained on a monthly basis so you can age your receivables and determine how long your credit customers are taking to pay their bills.

If you do not have the necessary experience, it is recommended that you hire a CPA to help develop your record-keeping system.

A number of one-book record-keeping systems are available. The Small Business Administration (SBA) has a publication, FM10 Record Keeping in Small Business, that lists many of these systems. Click here to access it online.

For a record-keeping 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. To keep effective records, you must be able to:

  • Identify earnings for self-employment tax
  • Identify the source of a receipt
  • Keep track of all deductible expenses
  • Figure depreciation allowance
  • Take advantage of capital gain and loss laws
  • Support items on your tax returns

Accounting Systems

Computerized accounting is the way most accountants do books each month. If you want to do your own books, you should consider an accounting program for your record keeping. There are several good accounting programs available at office supply retailers. Accounting systems range from simple and inexpensive to powerful and costly. Some of the available options include the one-write system, a ledger-less system for accounts receivable and accounts payable, standard ledgers and journals, 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.

The accounting system you choose should meet the needs of your business situation and, at the minimum, meet the following objectives:

  • Yield an accurate and precise picture of the operating results
  • Provide a convenient basis for comparing current data with previous year’s operating results and budgetary goals
  • Presented in a format that is useful to prospective creditors, bankers, auditors and management
  • Reflect losses such as theft and bad debt
  • Include compiling and filing reports and tax returns
  • 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