Keeping the Books: What’s the Best Approach?
Many companies have dedicated accounting departments, but yours isn’t one of them. But you need to maintain accurate financial records all the same. There are several strategies for keeping the books: paper and pencil, DIY accounting software, adding accounting to the duties of your administrative assistant or office manager or outsourcing the entire process to an accountant or record keeping firm. Each method has its pros and cons. The best method for your business depends on many factors, including the size of your business and your budget.
Disclaimer: The following is a general discussion of accounting and record keeping strategies for small and medium sized business owners. It is not intended to represent legal or financial advice. Please consult with a legal or financial professional for specific questions concerning your company’s accounting or bookkeeping needs.
Paper and Pen (cil)
If your business is very small, you may be inclined to rely on a tried-and-true standby: paper and pen or pencil. One the major appeals of this strategy is obvious: it’s much less expensive than almost any other record-keeping method. Another advantage that you may not have considered is that maintaining manual records keeps you on top of your company’s finances. If you’re keeping the books yourself, you know precisely where your company’s money is going.
Manual record keeping is fine with the IRS as well – as long as your records are accurate and readily interpreted. The Nolo legal web portal suggests a three-step approach to maintaining financial records for your business using the manual bookkeeping method.
- Maintain records of each transaction as it occurs
- Summarize records on a regular basis (e.g. weekly, monthly, quarterly)
- Synthesize your summarized records into financial reports focusing on specific aspects of your business (e.g. monthly profits)
Two essential aspects of a manual recordkeeping system are retaining your receipts and invoices and maintaining a thorough and accurate ledger. How and where you maintain your receipts is up to you – anything from a shoebox to a sophisticated filing system will suffice. You can also set up your ledger to your personal preferences. However, entering information from your receipts and invoices onto your ledger on a regular schedule is a must.
DIY Accounting Software
DIY accounting software shares one major advantage with DIY online or desktop-based tax preparation software: a minimized risk of math errors. Many DIY software programs also generate financial reports and other documents automatically from your receipts and invoices. That can save you a lot of time. In addition, several programs allow you to access your records on different computers or on your mobile device.
The TopTenReviews website lists several features that you should look for in considering a DIY accounting software package:
- Payment Processing – if your company accepts mobile or online payments from customers or suppliers, this feature is a must-have
- Employee and Payroll Management – look for features like direct deposit for paychecks, check printing and employee tax records
- Time and Expense Tracking – if you travel extensively, a software package that includes time and expense tracking allows you to input receipts into mobile devices
- Bill Payments – Software packages with this feature can generate recurring electronic payments or physical checks.
- Estimates and Quotes – Besides generating quotes, software packages with this feature often allow quotes to be converted into invoices.
- Inventory Maintenance – If the software package you choose cannot be upgraded to include this feature, you’ll need to insure that it’s compatible with the third-party invoice system you use for your company.
In-House Accounting and Bookkeeping
Your company may already have an office manager or administrative assistant that handles many of the non-line functions of your business – namely, keeping records. If (and only if) your office manager or assistant is trained and comfortable with adding financial record-keeping to his or her duties, this could be a viable solution. Especially if your office manager or assistant is a long time employee, he or she is well acquainted with how your business works, which is a definite plus. However, there are a few caveats to consider.
- Overburdening – Your office manager or assistant probably works pretty hard already. Adding financial bookkeeping to his or her duties may be too much to ask, unless you’re prepared to reassign some of his or her other duties to other employees – or outsource them.
- Increased Pay – Depending on the complexity of your financial records, you may need to consider giving your office manager or assistant a raise to compensate for the additional work.
- Possible Inaccuracies – Record keeping can be complex. If your office manager or assistant doesn’t have a background in accounting, he or she may not be up to the task.
Outsourcing Your Financial Record Keeping
Outsourcing your financial record keeping represents the ultimate solution. If you can afford to do so, contracting the services of a certified public accountant or accounting firm largely removes the responsibility for maintaining records off your plate. However, you can’t totally disregard the financial aspects of your business even though you’ve hired professional help. Nolo points out that you, not your accountant or accounting firm, still hold much of the ultimate responsibility for answering questions from the IRS about your company’s finances and record keeping. So you’ll still need to maintain a reasonable overview of your company’s books.
An Absolute Requirement: Keep Good Records
The IRS lists several types of records that it expects business owners to maintain for tax purposes. Different types of records must be maintained for periods that vary according to the type of record and the nature of your business. A general list of the types of records your business should maintain for tax purposes is included below:
- Gross Receipts – Income received for your business
- Purchases for Manufacturing and Resale – Raw materials or parts for finished products
- Operating Expenses – Office supplies, , etc. used in operating your business
- Travel, Transportation, Entertainment and Gifts – The IRS places stringent restrictions on reporting travel and entertainment related expenses. See Publication 463: Travel, Entertainment, Gift and Car Expenses for details.
- Assets – manufacturing equipment, office furnishings, vehicles, etc. used for the business
- Employment taxes – For a list of the specific records you must keep, see Publication 15: Circular E Employers Tax Guide.
The Take-Home Lesson
There is no one-size-fits-all solution to business record keeping, except that it’s essential for all business owners. Take the time and make the effort to determine which system works for you, bearing in mind that your needs may change as your business change. You should also be willing to call in professional help if you need it. The money you spend now could save even more money – not to mention stress and possible legal problems – down the line.
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