Good accounting records are the foundation of a successful business, yet surprisingly a lot of businesses are lacking this crucial tool. Accounting records inform business operations. “There is a reason why accounting is often referred to as the language of business. Accounting records are the primary tool business owners need in order to know how well the business is doing in the short, mid and long-term,” noted Liang Zhao, Senior Staff Accountant at Falco Sult.
Have you ever, personally, had the moment where you checked on your credit card statements and could not believe all the purchases you made that month? Similarly, with everything a business owner must deal with daily, it is very easy to lose track of your business expenses. However, if your books are up-to-date and you review your financial statements periodically, you will easily identify the expense categories that appear unreasonable, giving you the option to consider reducing unnecessary expenses or maybe looking for other vendors.
Here are some great tips to help you keep good accounting records:
- Keep personal and business accounts separate. You should always have separate business bank, credit card or other financial accounts set up under the name of your business. Also, keep only business transactions to those business accounts.
- Save all receipts and invoices. If you find folders and folders of paper receipts overwhelming, there are a good number of computer software and smartphone applications that can help you manage and organize receipts and invoices. You can simply scan all receipts from the same date into one file and name the file by the date of those transactions.
- Avoid using cash if you can. Cash is most susceptible to be lost and stolen and it can make record keeping very difficult.
- Invest in accounting software. Accounting software keeps track of a business’ assets, liabilities, income, and expenses, in addition to providing other value-added functions such as customer and vendor payments, payroll management, etc.
- Hire a competent bookkeeper. Liang Zhao said, “You might not need a bookkeeper when there are only a small amount of transactions; however, a good bookkeeper can be an asset to a company as the business grows. At a minimum, a good bookkeeper will keep your accounting records correct and up-to-date, and free you up to focus on business strategies and operations.”
Accurate accounting records will support tax reporting and save on tax preparation fees. Good accounting records will not only save you sleepless nights during an IRS audit, but they can also help you save on taxes. The IRS requires taxpayers to keep accounting records for up to seven years to support the income and expenses reported on their tax return. Without sufficient documentation to substantiate the deductions reported, the IRS may disallow those deductions, which could lead to a substantial tax liability increase, plus additional interest and penalties.
“CPAs love clients that keep clean books! If your CPA is too busy cleaning up your books, they might run out of time to review other areas that may add value to your business, such as business improvements and tax saving opportunities,” concluded Liang Zhao.