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P.O. Box 20683     Roanoke, Virginia 24018     (540) 774-7400
 

Starting a Business and Keeping Records

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Record Keeping


This part explains why you must keep records, what kinds of records you must keep, and how to keep them. It also explains how long you must keep your records for federal tax purposes. Click here to see a sample record keeping system.

Why Keep Records?

Everyone in business must keep records. Good records will help you do the following.

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.

  • 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 source of receipts. You will receive money or property from many sources. Your records can identify the source of your receipts. You need this information to separate business from non-business receipts and taxable from nontaxable income.

Keep track of deductible expenses. You may forget expenses when you prepare your tax return unless you record them when they occur.

Prepare your tax returns. You need good records to prepare your tax return.Support items reported on 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.

Kinds of Records To Keep

Except in a few cases, the law does not require any special kind of records. You can choose any record keeping system suited to your business that clearly shows your income.

The business you are in affects the type of records you need to keep for federal tax purposes. You should set up your record keeping system using an accounting method that clearly shows your income for your tax year. See Accounting Method, earlier. If you are in more than one business, you should keep a complete and separate set of records for each business.

Your record keeping system should include a summary of your business transactions. This summary is ordinarily made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. In addition, you must keep supporting documents, explained next.

Supporting Documents

Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books.

It is important to keep these documents because they support the entries in your books and on your tax return. Keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.

Gross receipts. Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include the following:

  • Cash register tapes.
  • Bank deposit slips.
  • Receipt books.
  • Invoices.
  • Credit card charge slips.
  • Forms 1099-MISC.

Purchases. Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

  • Canceled checks.
  • Cash register tape receipts.
  • Credit card sales slips.
  • Invoices.

These records will help you determine the value of your inventory at the end of the year. See Publication 538 for information on methods for valuing inventory.

Expenses. Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:

  • Canceled checks.
  • Cash register tapes.
  • Account statements.
  • Credit card sales slips.
  • Invoices.
  • Petty cash slips for small cash payments.

Tip. A petty cash fund allows you to make small payments without having to write checks for small amounts. Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment.

Travel, transportation, entertainment, and gift expenses. Special record keeping rules apply to these expenses. For more information, see Publication 463.

Employment taxes. There are specific employment tax records you must keep. See Publication 15.

Assets. Assets are the property, such as machinery and furniture that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets. Your records should show the following information:

  • When and how you acquired the asset.
  • Purchase price.
  • Cost of any improvements.
  • Section 179 deduction taken.
  • Deductions taken for depreciation.
  • Deductions taken for casualty losses, such as losses resulting from fires or storms.
  • How you used the asset.
  • When and how you disposed of the asset.
  • Selling price.
  • Expenses of sale.
Documents that may show this information include the following:
  • Purchase and sales invoices.
  • Real estate closing statements.
  • Canceled checks.

What if I don't have a canceled check? If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. These include account statements prepared for the financial institution by a third party. These account statements must be highly legible. The following is a list of acceptable account statements.
IF payment is by... THEN the statement must show the...
Check
  • check number.
  • amount.
  • payee's name.
  • date the check amount was posted to the account by the financial institution.
Electronic Funds Transfer
  • amount transferred.
  • payee's name.
  • date the transfer was posted to the account by the financial institution.
Credit Card
  • amount charged.
  • payee's name.
  • transaction date.

Caution. Proof of payment of an amount, by itself, does not establish that you are entitled to a tax deduction. You should also keep other documents, such as credit card sales slips and invoices, discussed previously.


Tax laws are subject to change at any time. Please contact us for the latest information.

Please Note: This information is provided to you by Accounting and Tax Center, Inc., for use as general guidance, and is not rendering specific legal, tax, or accounting advice. Only a qualified tax professional with all the facts at his or her disposal can determine the appropriateness of the application of any law to a given set of facts.

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