Financial Record Keeping: Best Practices for Small Businesses

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. 

One year

Records that you need to keep for at least one year are the following: 

  • Non-tax-related bank and credit card statements
  • Investment statements
  • Paycheck
  • 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.

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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. 

Don’t forget to subscribe to the Shoeboxed blog for more helpful accounting and bookkeeping knowledge and best practices for small business owners! 

About Shoeboxed

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.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

What Happens After I File?

Most taxpayers have already filed their federal tax returns but may still have questions. Here’s what you need to know about refund status, recordkeeping, mistakes and what to do if you move.

Refund Information

You can go online to check the status of your 2008 refund 72 hours after IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2008 tax return available because you will need to know the filing status, the first SSN shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:

  • Go to IRS.gov, and click on “Where’s My Refund.”
  • Call 1-800-829-4477 24 hours a day, 7 days a week for automated refund information.
  • Call 1-800-829-1954 during the hours shown in your form instructions.

What Records Should I Keep?

Good record keeping allows you to prepare a complete and accurate income tax return. You should keep all receipts, canceled checks or other proof of payment, and any other records to support any deductions or credits you claim.

Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property — should be kept longer.

You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending filed returns or preparing future ones.

Change of Address

If you move after you filed your return, you should send Form 8822, Change of Address to the Internal Revenue Service. If you are expecting a refund through the mail, you should also notify the post office serving your former address, which will ensure your check makes it to your new address.

What If I Made a Mistake?

Errors may delay your refund or result in notices being sent to you. If you discover an error on your return, you can correct your return by filing an amended return using Form 1040X, Amended U.S. Individual Income Tax Return. Here are five reasons to file an amended return:

  1. You did not report some income,
  2. You claimed deductions or credits you should not have claimed.
  3. You did not claim deductions or credits you could have claimed.
  4. You should have claimed a different filing status. Taxpayers who filed a joint return cannot choose to file separate returns for that year after the due date of the return. However, an executor may be able to make this change for a deceased spouse.
  5. If you bought or are thinking of buying home, you may be able to file an amended return to claim the First Time Home Buyer Credit. Taxpayers who purchased a qualifying home can claim the Homebuyer Credit on the 2008 return without waiting until next year to claim it on their 2009 return.

Visit IRS.gov for more information and Frequently Asked Questions regarding refunds, record keeping, address changes and amended returns.

Avoid Recordkeeping Headaches This Tax Season

Keeping and organizing receipts is one of those things that every small business must do but doesn’t want to. But we tell ourselves that sitting down to scan receipts for hours on end or entering data into an endless spreadsheet is what we need to do in order to make taxes manageable. The IRS needs to see documentation about your spending and purchases, so keeping these records is extremely important, even if there are better ways to scan and organize receipts. Below is some advice straight from the IRS about receipts and recordkeeping for taxes:

You probably already keep records in your daily routine. This includes keeping receipts for purchases and recording information in your checkbook. Keeping these and other records will help you avoid headaches at tax time. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

  • Bills
  • Credit card and other receipts
  • Invoices
  • Mileage logs
  • Canceled, imaged or substitute checks or any other proof of payment
  • Any other records to support deductions or credits you claim on your return

Good recordkeeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.

Know What Records You Should Keep for Taxes
Know What Records You Should Keep for Taxes