Keeping accurate financial records is critical for smooth tax preparation. And maintaining precise records of all financial transactions keeps a business compliant with regulations and standards. But some of the best systems are those that are easy to maintain. Today, we’re discussing 6 simple record-keeping best practices for small business owners to streamline their bookkeeping!
What kind of records should a small business keep?
It is important to know what type of records you should keep, whether you manage them with a software program or a manual form of record-keeping. Documents such as receipts, gross receipts and business expenses, debits, and credit statements should be stored for easy retrieval.
The table below categorizes the three types of documents to keep as a small business owner:
|Expense related||Gross-receipt related||Purchase related|
-Cash register tape receipts
-Canceled checks or
other documents proving payment
electronic funds transferred
-Cash and credit sales
-Cash register tapes
-Cash register tape receipts
-Credit card receipts and statements
6 simple record keeping best practices for small businesses
1. Incorporate a good document management system into your business
As your business grows, you’ll need to keep track of an increasing number of documents and files. Instead of having paper records on your desk and in your drawers, try going paperless so you can access your records easily, at any time, from anywhere.
You can then set up a digital document management system to help keep track of all your business documents. Then install a document control system that determines how often documents are reviewed and updated.
2. Back up and secure your business records
We operate in a time when data breaches and natural disasters are commonplace. Therefore, having backup copies of your important data in a safe place ensures you don’t lose it if something bad happens. Make sure to store your records in at least two places, on paper and on a hard drive or on the cloud. If you have more than one copy of something, keeping them all in different places is important. You’ll still have the others if something happens to one of them.
Storing your important documents in digital form is a good idea as it protects them from being stolen, lost, or destroyed. However, storing records digitally also increases the risk of them being stolen. So be sure to secure your online business records with a strong and unique password and to enable two-factor authentication.
3. Understand the lifecycle of business records
Business owners must keep important financial documents for a certain period for tax filing and auditing purposes. It is important to ensure that all retention and disposal schedules are followed correctly for each type of record.
The following documents are essential to keep, and the timeframes for keeping them are as follows.
a. Longer than a 7-year period
Keep your tax records for at least seven years. This will ensure that you have all the information you need in case of an audit. The IRS mandates 3 years for the statute of limitations for an audit. In some situations, the IRS can go back six or seven years to audit your taxes. The time limit for filing a state tax return varies from state to state, so work with a tax professional to determine the time limit in your state.
You should keep records that support the information on your taxes for up to seven years, including your W-2 and 1099 forms, receipts, and payments. Additionally, keep records of any assets you own, such as receipts for home renovation work, for as long as you own those assets.
b. One-year period
Records that you need to keep for at least one year are the following:
- Medical bills
- Investment statements
- Non-tax-related bank and credit card statements
- Receipts for large purchases
Don’t throw away records related to your current year’s tax preparation or any unresolved insurance disputes for at least a year. Most financial institutions, including credit card companies and banks, send customers electronic statements. Hence keeping paper versions on hand may be unnecessary. However, if you still want to keep a copy of those records, you can digitize them by scanning them with a receipt scanner before discarding the original paper documents.
This video compiles a list of documents you will need to file taxes. If you’re looking for more information on how to maintain documents as an independent contractor, check out “7 Useful Documents Every Independent Contractor Should Keep.”
c. Less than a year
There are some types of documents that you won’t need to keep at your house for very long. Don’t worry about keeping receipts unless they’re related to something important such as:
- Insurance claims
- Your tax returns
- Product warranties
You can typically dispose of monthly bills either after you’ve paid them or once they’ve been reflected in your bank statement. If you need to check anything later, see if you can access past invoices through your online account. Many service providers store past bills and invoices online for a period ranging from a few months to longer.
4. Start a new digital file for your records after each year
Creating a new file at the beginning of each year is a helpful way to save time and organize your information. This will make it easier to delete records you no longer need, such as when the five-year retention period has ended.
5. Keep records of transactions for bank reconciliations
Bank reconciliations help small businesses find mistakes in their records and better understand their financial situation. It’s a good idea to check that you have records for everything your business does. Some accounting software allows users to add documents to each transaction. This way, anyone who looks at your books can see the related record. Also, double-check every transaction in your accounting software to your records when you’re doing your monthly bank reconciliation.
6. Choose accounting software that can generate records
Today, different software can help create reports from customers’ invoices. Shoeboxed is a receipt scanning and expense management app that allows freelancers and small business owners to keep track of their spending. This app can help you with your reports by doing some work for you.
After scanning your receipts, Shoeboxed will create reports you can send for approval immediately. Shoeboxed helps small business owners save time and effort by taking care of tasks that are not as important. This way, the business owner can spend more time on more important tasks.
See also: The Accounting Cycle Explained
Frequently asked questions
The most important part of the process is the “capture” step, which is also the most difficult. You need to keep track of all the money you spend on your business and all the money you make from sales. This will help you know how much money your business is making or losing.
A financial record-keeping system is a system that helps you monitor all the money your business makes and spends. This includes processing payroll and documenting bills and sales from vendors. It helps you oversee all the money going in and out of your bank account.
1. Review your business’ cash status as part of your daily business accounting tasks.
2. Record transactions, keep track of documents and receipts, and review unpaid bills from vendors on a weekly basis.
3. Go through your books every month, focusing on reconciliations of transactions, review of past due accounts, and comparisons of last month’s and this month’s balance sheet.
4. Don’t forget to do a quarterly check-in on your accounting books for sales and estimated income tax.
5. Double-check past-due receivables, your inventory, and income to file taxes and understand the growth of your business in the past year.
- The Small Business Accounting Checklist for 2022 [Infographic]
- Monthly Bookkeeping Checklist: An Easy Guide
- Tax Checklist 2022: What to Know, Do, & Prepare for Tax Filing Day
Bonus infographic: 6 best practices for small businesses on simple financial record keeping
The bottom line
It can be hard to keep track of your finances at first, but doing so is important. Even if you don’t have an accounting background, you can still run your business smoothly if you follow some simple financial record-keeping best practices. The most difficult part of financial record keeping is getting all the information one needs.
Shoeboxed can help!
Shoeboxed is the complete receipt tracking and expense management solution for small business owners who are looking for an expense-tracking app.
Originally published June 24, 2022. Updated on September 3, 2022.
Shoeboxed is a receipt scanning service that supports multiple methods for receipt capture: send, scan, upload, forward, and more!
You can stuff your receipts into one of our Magic Envelopes (prepaid postage within the US). Use our receipt app (iPhone, iPad, and Android) to snap a picture while on the go. Auto-import receipts from Gmail. Or forward a receipt to your designated Shoeboxed email address.
Turn your receipts into data and deductibles with our expense reports that include IRS-accepted receipt images.
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