Every business owner must keep their records organized and up-to-date. These records cover the financial transactions, daily operations, and other vital information of the company. But as owners have a lot on their plate, they may not be able to focus on record-keeping. This is where Louisville small business accounting services come in handy. An accountant keeps records of documentation necessary in preparing financial statements, those related to audits and financial reviews, and those for tax filing and compliance.
Business Records to Keep
Retaining effective business records ensures you comply with legal requirements and make informed decisions. Also, this can help improve business efficiency and protect your company from possible risks. Keeping financial records guarantees accurate reporting for audits, financial management, tax purposes, and financial health monitoring.
Your business must maintain legal and corporate documents to comply with regulations, protect your rights, streamline your operations, and resolve disputes. Keeping operational records lets you analyze business trends, enhance efficiency, and address possible problems on time. Also, keeping employee records helps you achieve legal compliance.
Moreover, tax records are necessary to meet legal obligations and prepare accurate returns. In general, the IRS recommends keeping tax-related records for a minimum of three years. Financial records that must be kept include bank records, invoices and bills, receipts, emails and text messages, tax records, correspondence with the IRS, W-2 and 1099 forms, income tax returns, and others.
How to Maintain Business Records Effectively
To keep business records, below are steps you can take:
- Take organization and categorization seriously. Having a logical filing system allows you to locate and retrieve needed documents whenever you need them.
- Decide how to retain and dispose of records. Spell out how long you should retain every kind of record based on the needs of your business and legal requirements. Once a record needs to be disposed of, protect it against a confidentiality breach.
- Back up. Digital records should be backed up to ensure you do not lose data. Also, security measures should be taken to protect sensitive data.
Importance of Record-Keeping for Your Business
Your business must keep adequate records for the following reasons:
- Monitor the progress of your business. The records you keep allow you to monitor business expenses and revenue and keep track of business progress. Good records can demonstrate whether you are making or losing money. Also, they can show the items that are selling fast and the ones that aren’t.
- Prepare financial statements. Effective record-keeping allows you to prepare accurate financial statements. These statements include profit and loss statements and balance sheets. They are necessary in a lot of situations like managing your business, taking out a loan or credit line, getting credit, or selling a business.
- Identify income sources. Businesses get funds from a lot of sources. Records can identify your income sources. The information from these records helps you segregate taxable business receipts from non-taxable ones.
- Keep track of deductible expenses. Many business expenses qualify as deductibles and may lead to significant tax savings. Management must record such expenses promptly, so you can remember them when you prepare your returns.
- Prepare tax returns. As a business owner, you must prepare and file tax returns accurately. Records must support the reported tax amount. Also, they should support the various income, credit items, and expenses. You must file tax returns with various state and federal authorities by set deadlines. Good records make preparing tax returns less stressful.
In addition, business records must be kept available for IRS inspection. The inspection process may include explaining reported items and how supporting documents like invoices and receipts. Accurate records can streamline this process.
