What is Recordkeeping?
By definition, recordkeeping is a process of documenting transactions into an accounting system. It is a vital part of accounting that deals with accurate and thorough recording of finances. Essentially, recordkeeping is a record of how you are making and spending your money.
Since it deals with finances, it is an essential part of any business. When you have a clear understanding of how business finance works, you will recognize the importance of having an accurate recordkeeping system. Recordkeeping will also show you how you can better handle your business, so you make sure it will thrive and grow.
What is Recordkeeping for Businesses
Through recordkeeping, an entrepreneur will have a clear picture of how the business is doing. By checking the records and analyzing data entered, business owners will know the overall health of their business.
How important is keeping records for a business?
Keeping a complete and accurate record is essential for:
Files will allow you to have a history of your business dealings. These saved files will serve as a reference to check information about your business. You can see who owes you how much or how much you have paid for your business loans. Without an accurate and organized recordkeeping method, you might end up not recouping much of your money.
Tracking Business Transactions
Records also help you track recent purchases and compare it with past performance. It can also serve as a business analysis portfolio to check whether your current production output is meeting the demand or not. Tracking your business income and expenses allows you to check business growth. Monitoring your costs will allow you to assess which areas in your business you are spending most of your capital and profit. Through this, it will be easier for you to see which areas you need to cut down on expenses should the need arise. They are also an excellent tool for checking deductibles and preparing tax returns.
Through recordkeeping such as financial statements, you can make predictions about future revenue and potential expenses. They are also useful when deciding to invest in growing the business.
Filing of Taxes
Records are legal documents that you have to keep. Government regulatory bodies can show up in your office and demand to see your records. Records of transactions can serve as proof of legality of your business. These files will also show that you are paying the correct taxes.
Tax records are essential for business owners to keep. Unorganized tax records may cause you to pay for penalties, and it may also cost you money and more significant problems if you are suddenly audited.
Take note that the Internal Revenue Service (IRS) requires business owners to keep tax records for at least three years. According to the IRS, the length of time of recordkeeping relies on the expense, action, or event the document records. In general, records that prove an item of income or deduction on the tax return must be kept until the period of limitation for that tax return expires.
The IRS allows business owners to get a copy of transcripts. Taxpayers can get copies of their:
Tax Return Transcript – business owners can get the transcript of the current tax year and the tax returns processed in the last three years. Note that the transcript will not show any changes made after the filing.
Tax Account Transcript – this record will show only the primary data about the taxpayer such as marital status, tax return type, adjusted gross income, and taxable income.
To maintain an exhaustive record for your business, you will have to keep:
- Bank transactions
- Credit card statements
- Canceled checks
- Proof of payments
- Financial statements from bookkeeper
- Tax returns from the previous year
Depending on the type of business you operate, you might need to keep additional records. To be sure, consult a Certified Public Accountant (CPA) at the start of the tax year. They are the best persons to instruct you on how to maintain your records.
What is a Records Management System and Why is it Important
Recordkeeping, when done right, can save you many headaches. Many small businesses commit the mistake of keeping records inefficiently. A Records Management System (RMS) maintains a record for an organization throughout its life cycle. It includes an efficient and systematic control concerning the creation, preservation, and disposal of records along with associated business transactions.
Keeping important files is more than just for compliance standards. Beyond the legal mandates, maintaining an RMS is vital for an organization, as this will make sure that your business, along with its sensitive information, can only be accessed by authorized individuals.
An effective records management ensures that there are no redundant data, which will help reduce the cost of recordkeeping. An RMS will also ensure that all records are compliant with standards and regulations set by the industry. Businesses benefit from RMS by reducing their litigation risks. Well-protected and secure records limits access to vital information about the company. Additionally, business owners can make corporate decisions when they have easy access to a well-kept record.
The Bottom Line
Recordkeeping can be intimidating, especially if you have to deal with tons of paperwork and financial data. However, it is a necessary evil for business owners. Entrepreneurs who have a firm grasp of their finances can run the business smoothly. Your company, no matter how good it performs in the market, will ultimately go downhill if those handling the finances do not have the necessary knowledge. Keeping records and books of accounts will give a good picture of your company’s financial health. Through this, you can make the best decisions for the growth of your business.