Financial record keeping is essential for smooth tax preparation. Keeping the process of recording all financial transactions thorough, accurate, and precisely helps a business succeed and helps its finances meet all regulations and the required standards of operation.
This article will suggest six financial record keeping best practices for small business owners to simplify their bookkeeping.
Incorporate a good document management system into your business
As you grow your business, your business documents and files expand, too. Instead of stacking your desk and drawers with piles of paper, try to go paperless so you can access your records easily, at any time, from anywhere.
You can then implement a digital document management system to organize all your business documents. Then set a document control system that specifies how often to review and update documents.
Back up and secure your records
We live in a time where data breaches and natural disasters are rampant. Take time to back up and secure your records to avoid catastrophe. Whether you store your records on paper or a hard drive, remember to back them up in at least two places.
Digitizing all your important documents is also a good idea as it protects them from being lost, stolen, or destroyed. However, storing records digitally increases the risk of theft. So when you store your business records online, secure your account with a unique and strong password, and enable two-factor authentication.
Understand the lifecycle of records
Every record will have its own lifespan, and some financial documents must be kept for a certain amount of time. It’s necessary to ensure that all retention and disposal schedules are correctly applied to each type of record generated in each department.
Here are the essential documents you need to keep and the time you need to keep them.
Seven years or longer
When it comes to taxes, it’s a good idea to preserve any tax records for at least seven years. The IRS’s audit statute of limitations is three years. In some situations, they can go back as far as six or seven years (e.g., if you underreported your income by 25% or more.) State statutes of limitations vary, so you can consult a tax professional to understand your state’s limitations.
You should also keep for up to seven years any records that corroborate the information on your taxes, such as your W-2 and 1099 forms, receipts, and payments. Keep receipts for any assets you own for as long as you own them, such as receipts for home renovation work.
Records that you need to keep for at least one year are the following:
- Non-tax-related bank and credit card statements
- Investment statements
- Medical bills
- Receipts for large purchases
If you need to support your current-year tax preparation or have an unresolved insurance dispute, don’t throw away these records for at least a year!
Many banks and credit card companies now provide electronic statements, so it’s not necessary to keep paper versions on hand. 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.
Less than a year
Some documents do not need to be kept in your home for an extended period of time. Don’t bother about keeping receipts unless they’re related to:
- Product warranties
- Your tax returns
- Insurance claims
You can throw away most monthly bills after paying them or after they have been deposited into your bank statement. If you need to go back to verify anything later, see if you can access past invoices through online account access. Many service providers store past bills and invoices available online for the past few months or longer.
Start a new file after each year
Starting a new file at the start of each new year is a simple method that can help you save a lot of time and make going through your information much easier.
It will also make it easier for you to remove records you no longer need for whatever reason, such as when the five-year retention period has expired.
Keep records of transactions for bank reconciliations
Bank reconciliations help small businesses detect errors and better understand their financial situation. It’s also a good opportunity to double-check that you have records for all of your business dealings.
Some accounting software allows users to attach documents to each transaction, so anyone who opens your books can view the associated record. It’s good to match every transaction in your accounting software to a record during your monthly bank reconciliation. Make sure you have a corresponding invoice, receipt, or contract as you go through your company activities.
You might also be interested in:
- Business Receipts Basics: What You Need to Keep for Tax Seasons?
- Best Ways to Store Your Receipts and Keep Them Organized
- How To Do Bank Reconciliation: A Beginner’s Guide
Choose accounting software that can generate records
Today, many accounting software can generate reports from customers’ invoices. For example, Shoeboxed, the painless receipt scanning and expense management app tailored for freelancers and small business owners, can take over the heavy task of preparing reports from your plate.
After scanning your receipts with OCR engines, Shoeboxed will automatically create clear and comprehensive reports so you can send them out for approval immediately. Shoeboxed can help small business owners save time and effort, allowing them to spend more time on the business’s core.
The bottom line
Keeping financial records properly can be challenging at first. Still, as long as you keep these financial record keeping best practices in hand, you’ll be able to run your business smoothly even if you don’t have an accounting background. The most difficult part is collecting the information. After you’ve formed the collecting habit, the rest will be in place.
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Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.