WHY all businesses MUST keep accurate & complete records.
For ALL business owners, keeping accurate and complete books is critical to starting, operating, or selling their business.
For new business start-ups, it is critical to keep proper books of records from day one.
ALL Businesses, from seasonal to year round, from full-time to part-time, home-based or not, ARE required by the IRS Tax Code to keep accurate and complete records in order to file tax returns that properly reflect income, expenses, deductions, and tax credits.
Of course, there are many other reasons to keep proper books such as:
1-Lenders often require financial statements and tax returns when considering lending money or lines of credit to a business.
2-Business owners can track business operations over time.
3-Potential buyers of the business will want financial statements and tax returns.
4-To research and answer customer, suppliers/vendors, and other third party inquiries and questions.
5-To avoid potential legal issues.
HOW to properly record or keep accurate and complete records for tax purposes
Whoever keeps the books must know HOW to correctly record various business transactions.
Below are a few common business transactions and how they should be recorded.
NOTE: Personal accounts and expenses should NEVER be commingled with business accounts. Personal expenses should NEVER be paid with business funds.
Owner capital contributions to the business
Is recorded in the owners' equity account as capital contribution and should be tracked for each owner.
It is not income to the business.
Owner Draws or Distributions from the business
Is recorded in the owners' equity account as a draw or distributins and should be tracked for each owner.
It is not an expense or deduction for the business.
Business Loans Made To The Business &Loan Repayments
Are either a short-term or long-term liability.
Is not income to the business
Loan repayments should be broken down into principal repayment (which decreases the liability) and interest expense (if the loan bears interest). The lender should provide an amortization schedule for this breakdown of each loan payment.
Sales Tax charged to customers
Is a short-term liability.
It is not an expense of the business (the customer is paying the sales tax; the business is simply collecting this and paying to the tax agency).
Credit Card Transactions
A separate account should be set up for each business credit card and reconciled monthly.
Each business item purchased with a business credit card should be recorded into its proper expense account (with the description of each expense).
Employee Payroll-Basis Rules
Payroll expenses of the business include: Gross salaries or wages; Employer's share of Social Security Tax and Medicare Tax; Federal and State Unemployment Tax. (NOTICE that it is the business/employer who is actually paying these items and thus they are deductible business expenses.
Federal income tax, social security tax, and medicare tax withheld from the employee's paycheck are NOT expenses of the business (there are payroll liabilities to be remitted to the proper tax agency)
OF COURSE, there are many other types of business transactions to consider but the above are a few common transactions that are often recorded incorrectly.
Types of Accounts
The following types of accounts include:
Within these main categories of accounts are various subaccounts for further detailed information.
It is critical that each business transaction is properly recorded in the correct account(s) to prepare accurate and complete financial statements and tax returns.
CALL NOW 561-746-1926 or 561-339-8102 if you have any questions or concerns or would like to schedule a FREE, Confidential, No-Obligation Tax-Saving Consultation.