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Recordkeeping & Organizing

WHY, should we maintain good records?

To manage our business more effectively & efficiently

To identify the trends in our operations (what is

happening in your business)

To have supporting documentation for tax returns (or, an audit?)

To have information (historical data) to assist in financing from a 3rd party

For documentation if we wish to sell the venture

Other Reasons for Accurate Recordkeeping

• We may be able to maximize our business deductions

• Provide evidence to support our side in case of litigation

• Maintain information to pass on to our family (family business)

• We have archives to help us write an autobiography…should we want to in the future

Who should do your Recordkeeping?

• You, the owner, should be personally involved because it makes you aware of what is going on in your business

• If you delegate many of the tasks, you still need to attempt to understand what is going on in your business

• Learning how to read records and financial statements allows you to make better decisions in your business

When Does Recordkeeping Begin?

When your business idea is refined! You need not wait until you have a

license to start with recordkeeping. Many of your initial expenses are

deductible (if you are actively pursuing your business).

Checkout the IRS tips for small business recordkeeping!

Do You Need an Accountant or a Bookkeeper?

Special expertise is needed at the end of the year. You can use a CPA (Certified Public Accountant).

Enrolled Agent (Tax Accountant), or non-certified bookkeeper.

A CPA or Tax Accountant could represent you in an IRS Audit.

Tips

1. Develop a good working relationship with your accountant.

2. Shop around for a professional that specializes in small business

3. Many small business owners are afraid of the costs and try to do it all themselves…but remember…

Getting things done right the first time costs less in the end!

Accounting Software

First rule, use what you understand and feel comfortable with

Start with a manual system and you can later translate it into a computer application

Many industries have “tailored systems”

KISS - Keep it Simple - Systematic

Computerized Accounting Packages

Computerized Accounting Information Systems can -

• save time

• be more detailed than manual systems

• improve traceability

• have increased timeliness of statements

Make sure you select appropriate hardware for your software and have the program properly installed & frequently backed-up.

Computer Applications for Small Businesses

Several small business-focused packages include:

QuickBooks Pro, Peachtree Complete Accounting, MYOB Plus and Simply Accounting

QuickBooks Pro is currently the market leader. It offers over 100 customizable reports that can be exported to an Excel spreadsheet. It automates check-writing, invoicing, billing, payroll & receipts.

Income vs. Expenses: Basic Facts

Income or Revenue is all the monies received by your business in any given period of time.

1986 Tax Reform

Income = Deposits

Expenses are all monies paid out for your business. Those paid by check & cash.

Expenses require careful recording!

Expenses can Include

• Cost of Goods Sold (COGS), or Inventorycost of merchandise or inventory, material or labor sold during an accounting period

• Variable Selling Expensesexpenses directly related to the selling of your product

• Fixed Expensescosts not directly related to your production (like normal office overhead)

• Other Expenses- like interest paid for purchases and loans

What are “deductible” Expenses?

Those expenses allowed by the IRS when you are computing the net profit (or loss) of taxable income at the end of the business year

To minimize your “tax liability” you need to be familiar with expenses that you are allowed by law to deduct!

Common Deductible Expenses

• To get an updated list call or visit the IRS at www.irs.gov

• A new business owner should become familiar with the deductible expenses and keep on-going records

• HINT! Don’t wait until Tax Preparation Day to start recording your expenses.

• Check with your accounting professional for clarification and changes in tax laws.

IRS Publication “Must Haves”

www.irs.govwww.ftp.irs.gov

Publication 535: Business Expenses

Publication 334:Tax Guide for Small Businesses

Publication 583: Starting a Business & Keeping Records

Publication 587: Business Use of Your Home

It’s a “write-off”?!?Common Deductible Expenses

Deductions to be expensed include: Advertising, Bad Debts, Bank Charges, Book & Periodicals (business related), Car & Truck Expenses, Commissions (to sales reps), Contract Services, Convention Expenses, Displays & Exhibits, Donations, Dues (to professional organizations), Education expenses, Electricity, Freight, Gas, Leasehold Improvements, Insurance, Interest Paid Out ,Laundry (uniforms), Legal Fees, Maintenance, Office Equipment & Furniture (under $100), Office Supplies, Parking Fees, Pension Plans, Postage, Printing, Professional Services, Promotional Materials, Property Tax, Publications, Rent, Repairs, Sales Tax Paid, Subscriptions, Telephone, Tools, Uniforms, Wages Paid Out

Deductible or Depreciable?

• Fully deductible expenses include all expenses incurred in the operation of your business over the entirety of the year. Expenses are itemized and all receipts should be kept!

• Depreciable includes property (over $100) that has an expected life of over one year. Generally include vehicles, buildings, other equipment & intangible goods.

• Use the General Accepted Accounting Principles (GAAP) guidelines for depreciating.

Cash or Accrual:Two different Recordkeeping Methods

The difference is based on the recording and reporting of the income and expenses.

• Cash Accounting - is the reporting of revenue and expenses at the time they are actually received or paid.

• Accrual Accounting - is the recognition of revenue and expenses at the time they are earned or incurred not necessarily collected or paid.

Should My Business Use Cash or Accrual?

An important decision to make early in the life of your business. Once established, it is difficult to change due to IRS requirements.

CASH is easier for small businesses. It allows for single-entry accounting & taxes are paid on cash actually received. Suitable for small service businesses.

ACCRUAL provides a more accurate picture of when revenue and expenses are incurred. Use the accrual if your business offers credit or your business has extensive inventory. The IRS requires that certain types of businesses use the Accrual Method.

Check with your accounting professional before you decide!

Common Sense Tips on Record-Keeping: Find the system that works best for you…

BASICS

Check Register- preferably a separate bank account for your business

Summary of receipts of gross-income- totaled on a daily, weekly and monthly basis (explain the origin of the income)

Monthly summary (list) of expenses

Disbursement Records (check register or expense journal)

Asset purchase listing

Employee compensation record

Essentials:Common General Records

• General Journal• General Ledger• Revenue & Expense

Journal• Petty Cash Record• Inventory Records• Fixed Assets Log• Accounts Receivable• Accounts Payable

Essentials:More Common General Records

• Independent Contractors Record

• Payroll Records• Mileage Log• Travel• Entertainment Records• Customer Records• Business Checkbook• Filing System

Do I need all these Record Books?

Probably not. You need to think about keeping the system

simple and workable You may have to customize some records to

accommodate your particular industry You should eliminate any records that are

unnecessary (ex: if you are paid at the time of service

you don’t need accounts receivable). Records are utilized in the development of

financial statements, so keep to the standard format

Beginning & the General Journal

General Journal is used to record all types of records that a business has in chronological order.

An understanding of the terms “debit” and “credit” are necessary.

Your “accounting” begins here, where you record your “raw” data from sources such as sales slips, purchase invoices, check stubs and your shop register

You may have several journals (sales, purchases, revenue, expense)

The Accounting Cycle

I. A business transaction occurs, giving rise to an original document that is recorded in a journal.

II. The totals of the journal are summarized and reported in a book of accounts or a general ledger.

III. The individual accounts are listed as debits & credits in a trial balance of the general ledger.

IV. From the trial balance, after making adjustments you can prepare financial statements.

General Ledger and the Chart of Accounts

• A summary book for all the transactions and account balances

• A computerized system can post electronically and save you lots of time.

• Accounts are “assigned” a posting two-digit number depending on the class of the account. This is called a “Chart of Accounts”

General Ledger & Chart of Accounts

The General Ledger is a summary book that records all transactions and balances. It is organized into 5 distinct categories. With a computerized accounting it is essential that these are set-up

accurately in relationship to your Chart of Accounts

1 – Assets - a record of all item the business owns

2 – Liabilities - a record of all debts the business owes 3 – Capital - a record of all ownership or equity

4 – Revenue or Sales - a record of all income earned for a specific period

5 – Expenses - a record of all expenditures incurred during a given time

Inventory Controls & Inventory Records

Inventory Records help you track an important asset (probably one of your

largest investments)

Inventory (by the way) affects your net profit. How much or how little you stock at tax time will not lower your taxes (check out the Tax laws for retailers…Accrual

Method)

Accurate recording also allows you to determine the selling trend of goods

Inventory Records (Continued)

• Computerized registers assist retailers in tracking what is purchased and should be measured against the inventory record you keep on a timely basis

• It is not uncommon for retailers to “lose” inventory through employee pilferage or other losses like spoilage. This can make or break a business!

• Business owners that regularly track their inventory are more profitable

Accounts Receivable & Accounts Payable Records

Credit is a wonderful thing…even in business

If your business is going to use credit with wholesalers or distributors or suppliers you will need to track credit extended to you through Accounts Payable records

A/P records are essential for keeping your business in good standing with your creditors which allows you to use your CASH more wisely and better leverage your finances

If you, as a business, extend credit to your customers an Accounts Receivable tracking system is important to implement. Often a separate A/R record is set up for each individual or “account.”

The A/R is generated from the invoices.

Mileage Log or Mileage Book

These are those ordinary and necessary expenses getting to/from work, or using a vehicle for your work.

If you use a car for your business you may be able to deduct car expenses…but you have to keep good records.

Actual expenses include every expense associated with the use of a car (gas, oil, maintenance, licenses, insurance, leases) for work. This works best if you use your car predominately for business.

Standard Mileage Rate allows you to deduct a specific expense (in 2004 was 37 cents/mile, up to 8/31/05 40.5 cents/mile, now until

the end of 2005 it is 48.5 cents/mile) for the business use of your vehicle.

Entertainment / Travel Expense Record

• Use something like an MS Excel for expenses

• As you put expenses on the Excel spreadsheet it can act as a running “budget”

• This allows you to track all your expenses (assists you to know if you have enough deductible expenses at the end of the year in this category)

Payroll Records• Many small business owners don’t want employees

because of the cumbersome paperwork.

• In addition to having the hiring responsibility, you also have the responsibility to withhold, report and pay federal and state (and sometimes local) taxes.

• Many small businesses are choosing to “outsource” their payroll duties to professionals

• Working through a temp agency is also an option

• Think twice before you choose to go with Independent Contractors…

• These options can free up time, to allow you to do your job and grow your business

Hiring New Employees: The Paperwork

• File for a FEIN. federal employee identification number Form SS-4

• Obtain the IRS Employee Tax Guide

• Have employee fill out a W-4 and an I-9 (employment eligibility form)

• Post “Official Notice” in your ADA acceptable bathroom or employee lounge

Paying EmployeesThe Tribulations of FICA, FITA, FUTA and

the rest!What you must do: Determine frequency of payroll Determine Gross wage Calculate FICA (social security) Determine the Federal Income

Tax (from W-4)withholding Quarterly determine the FUTA

(unemployment) and report wages to IRS

Annually report FUTA and W-2

By the way, the IRS and Social Security cross-check your payroll withholdings!

Types of Accounting

Accounting can be defined as the process of recording, classifying, reporting and interpreting the financial data of an

organization.• Financial accounting is concerned with the preparation of

financial statements. • Cost accounting is concerned with the reporting of costs

(assets and expenses) as accurately as possible. • Managerial accounting is concerned with decision making and

the preparation of special reports to be used in making those decisions.

If a company buys a new truck,

Does it record the purchase price with or without tax (cost accounting)? After five years, does it spend $4,000 on repairs, or does it sell the truck (managerial accounting)? What amount has been reported on the financial statements for the truck in the last five years (depreciation - financial accounting)?

Financial Statementsthree most important

• Income Statement - Represents a period of time. Evaluates gains versus losses.

• Balance Sheet - Represents a “snapshot in time”. Evaluates an entities net worth.

• Cash Flow Statement - Represents a period of time. Evaluates the sources and uses of cash within an entity.

Financial Statements

• Good Recordkeeping will allow you to develop Financial Statements

• Savvy business owners use their financial statements to evaluate the condition of their businesses and determine strengths & weaknesses

• Bankers utilize these statements to determine if you are bankable.

A = L + OEWhat is a Credit (CR) and what is a Debit (DR)?

Increasing an Asset DRDecreasing an Asset CR

Increasing a Liability CRDecreasing a Liability DR

Increasing Owner’s Equity CRDecreasing Owner’s Equity DR

Increasing a Revenue CRDecreasing a Revenue DR

Increasing an Expense DRDecreasing an Expense CR

Analyzing your Records

One of the major reasons for keeping accurate records is so that you can analyze and chart the progress of your business. Looking at your records, you should be able to answer these questions:

1. Why are certain expenses at a particular level?

2. Are there any ways to reduce or avoid expenses?

3. Should I incur (show as an expense) all my expenses?

4. Does the level of profit justify the investment of my time and effort?

How long should I keep records?

• Keeping your documents organized and safe is an important element of good record-keeping

• Your Record Retention Schedule may depend on the complexities of your business (whether you are a sole proprietor or incorporated, whether you have employees or not, etc.)

• There will be some records that you need to keep for 7 years, and some that you need to keep permanently!

• Setting up a safe retention system can save you anguish in the future!