Choosing Your Record-Keeping System
© by Fred W. Daily
One of the first things a new business needs to decide is whether to do record
keeping, or hire someone to do it. For new businesses, tight cash often means no money to
hire bookkeeping help. But, keep in mind that even if you hire someone, the tax law places
the responsibility on your head for seeing it is done right. So, you must have a basic
grasp of records in any case.
Record keeping on a computer works on the same principles as a manual system,
only the computer automates the process so it's faster and more accurate
A simple-to-use software program like Quicken Home and Business eliminates the
need for a handwritten set of books. I started using Quicken in my law practice ten years
ago, and now it is unthinkable to ever keep my business records by hand. It works
particularly well for any type of service-providing business. This program looks like only
a checkbook register, but it is in reality, the backbone of the records for my business.
Each transactionan item of expense or incomeis input into Quicken as either
going out of, or into, my checking account. Each item is categorized as to type of expense
or income using either a number or namesuch as "advertising" or
"201." I also enter "cash" and "credit card" payments in the
same way. The best time saving feature of Quicken for me is being able to print out a set
of records in a few minutes, and at any time of the year. Those easy to make, but hard to
find, math errors no longer are a worry.
Small time operators often begin withbut soon outgrowa manual
record-keeping system. But if you decide to start with a manual system, as many small
businesses do, you'll need to understand how to do it. For a lot of folks, particularly
part-timers, the pencil and paper is adequate. Manual records satisfy the tax code as long
as they are accurate and can be understood or explained if questioned.
There are a few traditional ways to manually keep small business records.
Inexpensive, pre-formatted record books are available at most office supply stores. Or,
start with a pad of ledger sheetscolumnar paper usually light green in color. You
might create records something like this: going across the top of the sheet, list
categories of expenses, like "advertising" "utilities"
"supplies" "rent." If you don't know where something goes, put it in
the last column called "miscellaneous." Title the sheet "May, 1998."
As May progresses enter each transaction going down the page by date and method of
payment"cash" "check" "credit card." At the end of the
month, total up all the columns and bingo, you have an expense record that should pass IRS
muster. At the end of twelve months, add up all the monthly sheets and have expense
figures for your tax return.
Accountants call this a "single entry" system, meaning you enter each
transaction only once. As such, there is no automatic check and balance system, found in
computer programs, like Quicken, or in the more formal "double entry"
One last word: no matter whether you go computer or do it by hand, you will
still need to keep what accountants call "source" documentsreceipts, bank
statements, purchase invoicesthat back up the numbers used in your record-keeping
By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.
(This article was originally written for tax
practitioners who represent clients before the IRS. But the information
presented here is valuable for all taxpayers.)
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