by Simplice Essou | October 13, 2023
It is crucial for businesses to keep adequate business records for several reasons. Below are some reason why good record keeping is needed in business:
- Monitoring your business progress: Business owners need to keep good records to monitor revenue and expenses and monitor the progress of your business. Good records can show whether the business is making money or losing money. Good records, especially inventory records, can show which items are selling fast and which ones are not, thus, good record keeping increases the likelihood of business success.
- Preparing your business’s financial statements: Good record keeping is important to prepare accurate and timely financial statements. Basic financial statements include a profit and loss statement and a balance sheet. These statements are needed in many situations such as managing the business, obtaining a bank loan or a line of credit, obtaining credit from creditors or even selling the business.
a. Examples: The income statement shows the income and expenses for the business for a period such as January 1 202X to December 31 202X. The balance sheets show the business’s assets, liabilities and equity at a given date for example December 31 202X.
- Identifying the business sources of income: Businesses receive funds and/or properties from many sources. Business records can help identify the sources of your income. Business owners need the information provided by the records to segregate business receipts which are taxable from non-business income (not taxable).
- Keeping track of your businesses’ deductible expenses: Most business expenses are tax deductible and may result in substantial tax savings. Unless management records those expenses in a timely manner, business owners may not remember those expenses when preparing the business tax returns.
- Preparing business’s tax returns: It is the business owners’ responsibility to prepare and file accurate tax returns. Records should support amounts the business owner reports on the tax returns. Records must support the different income, expenses, and credit items. Tax returns are due to be filed with the different state and federal tax authorities by set deadlines. Having good records can make the tax return preparation less cumbersome.
- Supporting items reported on the business tax returns: The tax laws require business owners to keep business records available for inspection by the IRS at any time. During the inspection process, IRS agents may ask the business owner to explain items reported on the tax return and show backup documents such as receipts or invoices. A complete and accurate set of record can help make the process go smoother. It is a good practice to keep business records for a minimum of 7 years as that is enough time for defending audits.
Bookkeeping should not be a source of stress for business owners. Having a good accounting software, such as QB Online or Zoho can help automate the process. This will also allow the business owner to have timely financial data, which is crucial for keeping adequate business records and future decision-making.