Running a business can be extremely challenging. Making daily decisions that affect you, your family, your employees and your clients. Producing the products or service your business sells is very time consuming. The typical business owner is so busy and doesn’t have enough hours in the day on top of trying to keep receipts and transactions organized.
So, are you asking yourself this question?
Why should I keep business records organized?
One good reason is that the IRS highly recommends that everyone in business keep records. A second reason is that your CPA and/or Accountant thinks that it is a great idea too for multiple reasons.
Separate business and personal receipts
Each day, week and month while you save your receipts, make sure your records indicate the source of your receipts. You need this information to separate business from your personal receipts and taxable from nontaxable income. It is very important to have a system to keep track of your deductible expenses. This is a good start to prepare your tax returns.
Quicker year-end tax preparation
By keeping your records straight each month, you will be able to make your year-end accounting, recording and tax preparation quicker and smoother. A little bit of work each week and month will go a long way at the end of the year.
Quarterly taxes
Keeping good records regularly will ensure that your quarterly tax payments are accurate and paid on-time.
Loans / sale of business
Another good reason to keep clean records is if you are applying for a loan or you are considering selling your business. Bankers and investors will need this information and it makes you look even better if your finances are in order on time.
Business analysis
If you have current up-to-date financial information, it is easier to identify the strengths and weaknesses in your business and it helps manage changes and improvements in your business especially in a volatile market. You will be on top of your business and be able to see any trends quickly.
Here is a thorough list of the many reasons to keep your business records organized by the Internal Revenue Service shared on their website.
Keeping good records
Keeping good records is very important to your business. Good records will help you do the following:
- Monitor the progress of your business
- Prepare your financial statements
- Identify sources of your income
- Keep track of your deductible expenses
- Keep track of your basis in property
- Prepare your tax returns
- Support items reported on your tax returns
Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.
Prepare your financial statements
You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business.
- An income statement shows the income and expenses of the business for a given period of time.
- A balance sheet shows the assets, liabilities, and your equity in the business on a given date.
Identify sources of your income
You will receive money or property from many sources. Your records can identify the sources of your income. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income.
Keep track of your deductible expenses
Unless you record them when they occur, you may forget expenses when you prepare your tax return.
Keep track of your basis in property
Your basis is the amount of your investment in property for tax purposes. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.
Prepare your tax return
You need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.
Support items reported on your tax returns
You must keep your business records available at all times for inspection by the IRS. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination.
If you set up a system and implement it, you can easily keep your business records organized and ready to pass over to your CPA or accountant for tax season. In addition, you can strategize during the year about your finances and make good decisions about your plan and goals.
If you are overwhelmed with the concept of keeping your business records organized, make an appointment with your local CPA to set up a stress-free system that works for you.
Joshua Wilson, CPA, PC is a full-service public accounting firm that specializes in accounting, tax preparation, tax planning, & business development for small businesses in Monroe, GA and the surrounding areas. Give Joshua a call today to set up a consultation at 770-856-1309 or email him at josh@joshuawilsoncpa.com.