Knowing how to keep accounting records can be a daunting task, but it is necessary for any small business. The importance of maintaining these records cannot be overstated – and if you’re running a small business, the stakes are even higher because the consequences of record-keeping errors could be direr.
How to Keep Accounting Records for Small Business in 6 Steps
If you don’t have a sound system for recording transactions at this point, don’t worry—the following six steps will show you precisely what you need to do so that everything goes smoothly from here on out.
- Purchase the Right Accounting Software
- Track Your Expenses
- Develop a Bookkeeping System
- Back Up and Secure Your Records
- Keep Business Finances Separate From Personal Finances
- Put Time Aside to Do Your Book-Keeping Regularly
1. Purchase the Right Accounting Software
If you don’t already have software that allows you to keep track of your business transactions, even if it’s only petty cash accounting, it will be the first item on the list. There are plenty of options available—some are cloud-based while others you can download onto your computer.
Be sure to seek out a system that works well for your budget and is user-friendly enough for you or someone in your office to learn quickly.
2. Track Your Expenses
Once you have software, you need to use it. This should be easy because there are many different ways in which to do so. Record all receipts as they come in, input them into the system along with any other information required (such as where you purchased them), and set up reminders when you’ll need to do your taxes so you can get them together in time.
3. Develop a Bookkeeping System
Ok, so now you have the software and are using it, but where should you store all your records? You could throw them in a drawer or box somewhere—but no one will be able to find anything, and they won’t last very long (nor should you want them to).
The best choice is an accordion folder with dividers that separate each month’s transactions. Store this accordion folder in a filing cabinet or cabinet with similar folders for other years, depending on how far back you want to go with your records (you may not need subsidiaries if your business is new).
4. Back Up and Secure Your Records
Going electronic does not mean that you can take it easy on the backups. If you lose data, it could be costly for your business and your reputation (for instance, if you claim to have an impeccable record-keeping system but lose vital records).
Be sure to back up all files at least once a week and keep those files stored in different locations in case of damage to one place. Keeping records on a cloud-based system is a good option.
5. Keep Business Finances Separate From Personal Finances
You must separate finances between personal bank accounts and business accounts since this prevents any conflicts of interest about what funds are available when they are needed.
Even if you aren’t personally putting money into the business, you should make a separate account for it. You can even set it up as a legal business entity if possible for your situation.
6. Put Time Aside To Do Your Book-Keeping Regularly
It may take some time to adjust to the new system and how long things will take, but do not let that be an excuse to put it off or skip any steps. You must keep the end goal in mind: doing your taxes correctly and knowing where everything stands financially throughout the year.
Why Do Businesses Need To Keep Financial Records?
In the business world, knowing how to keep accounting records for small businesses is a fundamental skill that you can use in your personal and professional life. Maintaining organized financial documents will help you avoid problems with creditors, tax authorities, and other groups that rely on accurate documentation to work effectively.
DIY accounting is also a crucial component of managing a successful company, as it is how you can track your expenses, revenue, and profit margins. Being able to represent these numbers accurately will help you make the right business decisions for your growth.
Knowing how to keep accounting records for small businesses can also save money in many ways – even before you start doing taxes! So, how do small businesses keep records? Tracking every business expense helps to cut down on unnecessary spending because it allows you to easily spot holes in the budget.
It also enables you to identify where potential problems may lie so they can be managed appropriately ahead of time rather than coming up during tax season or after the fact.
Organizing financial documents gives you a leg up when filing taxes because all of the information you need is right at hand. This allows you to cut down on time spent preparing taxes, saving money, and any expenses associated with taking your records to a tax professional or prepping them yourself for home filing.
In terms of how long you should keep accounting records, there is a simple rule to follow. You should keep records for as long as they are helpful to the business. However, you should take steps to ensure that all of your company’s records are organized and up to date by the time tax season rolls around.
Tax records should be available within at least seven years from when they were created, so keeping them at least this long is a good step toward ensuring compliance with government rules. If you need to hold onto records for longer, you should store them off site so they remain safe and secure.
Keeping organized records and understanding accounting for small businesses can be a challenge, but it is well worth the effort. It will help you to avoid legal troubles and make smarter choices with how you manage your money. If you’d rather hire someone to help you, feel free to find an accountant and give us a call.