Bookkeeping/Accounting Tips for Small Business Owners

Warren Cooley, Managing Director

VEDC Entrepreneur Center

wcooley@vedc.org


 

  1. Introduction
    1. Mandatory – You have got to keep some type of records.
    2. IRS does not require business records to be kept in any one (1) uniform fashion.
    3. Any format OK as long as it paints a true picture of income and expenses.
    4. IRS, the author and enforcer of the tax code, does require that:
      1. You keep record appropriate to your trade or business (IRC, Section 6001).
      2. The records kept must be accurate (IRC, Section 6001-1(a)).
    5. Remember – the IRS and state tax agencies (in California, the Franchise Tax Board) has the right to audit and inspect your records:
      1. Income tax inspectors (IRS and FTB) will give written notice before showing up.
      2. Employment and sales tax auditors, however, can show up unannounced:
        1. Employment taxes are those that you withhold from employee’s pay, and portions of which you match; usually paid monthly or quarterly.
        2. Sales taxes are those that you collect for the state. Need to know which transactions are subject to sales tax and which are not.
  2. Bookkeeping Systems
    1. You need one.
    2. It can either be manual or computerized.
    3. Basics are the same:
      1. Create accounts (called Chart of Accounts).
      2. Make sure that you consistently enter income and expenses to the right account.
    4. If you have no employees, you can get by with a manual system, which would include:
      1. Checkbook register – Use a separate one (1) for business.
      2. Summary of receipts of gross income – totaled daily, weekly or monthly.
      3. Summary of expenses – totaled same as for gross income.
      4. Disbursement record showing payment of bills.
      5. Asset purchase listing (equipment, vehicles, real estate used in business).
      6. A good one is One Write.
      7. Illustrate with sample expense journal.
      8. Retain old records:
        1. Period of Limitations – revenue and expense records – three (3) years after you file your tax return.
        2. Keep paid bills, cancelled checks and other business documents where they can be easily found.
    5. Computerized systems – really easy to use; examples of programs available listed below:
      1. Record keeping – not adequate for sellers of goods that maintain inventory:
        1. Quicken
        2. MS Money
      2. Accounting:
        1. QuickBooks
        2. Peachtree
      3. Income Taxes
        1. Turbo Tax
        2. Tax Cut
  3. What Kind of Records to Keep
    1. Income records:
      1. Distinguish types of payments received, and source of each.
      2. You can use:
        1. Cash register tapes.
        2. Bank deposit records.
      3. Important – keep notes of all income.
      4. Make sure that you receive and provide 1099’s; IRS computer matches W-2’s and 1099’s.
    2. Expense records:
      1. Ordinary and necessary business expenditures are deductible against gross receipts.
      2. Asset purchases are also deductible, but under different rules; e.g., may not be able to write off entire expense in one (1) year. Depends on how much you paid for item, and the item type.
      3. Recording expenses only part of the job. You must keep proof that the bills were paid:
        1. Receipts.
        2. Invoices marked paid.
        3. Credit card charge slips.
        4. Canceled checks.
      4. Travel, meals and entertainment have more stringent record keeping requirements. For each you must document five (5) elements:
        1. Date
        2. Amount
        3. Place
        4. Business purpose
        5. Business relationship
      5. IRS no longer requires you to keep receipts, however, they make; life a lot easier if you ae audited. etc. for single expense expenditures of less that $75.00. One exception – for lodging, you have to keep a receipt no matter the amount.
    3. Asset records:
      1. Whenever a business purchase gives you a long term benefit – fax machine, building, car, office furniture, etc. – the IRS classifies it as a business asset or capital item.
      2. Keep a separate file that shows:
        1. Type of asset.
        2. Date of purchase.
        3. Amount paid for asset.
        4. Sales price of asset.
        5. Costs of selling the asset.
        6. Write a short explanation of how item is, or was, used in business.
      3. Long-term assets must be deducted differently than everyday expenses like rent, telephone, etc.
      4. Generally, can not deduct entire cost of asset in the year of purchase. Instead you must take depreciation of amortization deductions over several years.
      5. One exception to above stated rule – Up to $500,000 worth of assets may be written off in the year of purchase (IRC, Section 179).
    4. Special records for mixed property (items that you use for both business and personal purposes):
      1. Reason – You can’t claim tax benefit for personal use items.
      2. Most often used mixed property:
        1. Automobiles.
        2. Home offices.
        3. Cell phones.
  4. How Long Should Records Be Kept
    1. Normally, IRS has three (3) years to audit you and your business, starting from the date you file a tax return.
    2. However, if you never file a return, all bets are off. You can be audited forever.
    3. Furthermore, for serious tax reporting misstatements, IRS can go back six (6) years.
    4. State agencies can also audit records.
    5. For assets, you should keep records for six (6) years after you have disposed of asset.
    6.  Recommendation:
      1. Six years for all records except assets.
      2. See IV.e above for asset requirement.
  5. Bookkeeping Methods of Tracking Income and Expenses
    1. Two methods:
      1. Single-entry:
        1. Easy, but…
        2. Does not work for tracking inventory, loans, assets and liabilities.
      2. Double-entry:
        1. Each transaction requires entry once as a “debit” and the second time as an equal “credit”.
        2. Time consuming if done by hand.
        3. Computer system much easier.
  6. Timing Methods of Accounting
    1. Cash – record an item of income or expense when it is paid.
    2. Accrual – record an item when accounts receivable or accounts payable is created:
      1. Income treated as received when earned.
      2. Expense recorded at time obligation incurred.
    3. Hybrid – beyond scope of this discussion.
    4. Business must choose an accounting method and tell IRS which method it is using. See box on tax return.
    5. There are requirements for changing (see IRS Form #3115 Application for Change in Accounting Method)
  7. Accounting Periods

  1. Calendar year – Sole proprietors, partnerships, LLC, LLP, and S corporations.
  2. Fiscal year – C corporations
  3. Short tax years – occurs when a business starts on any day but January 1st, or the first day of a designated fiscal year for C corporations. Challenge here is pro rating certain deductions, like depreciation of assets.
[1] Emphasis on some not all, and before using any of this information to make financial decisions you need to check with your Accountant.

 

 

 

 

 

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