Business Records Requirement Guidelines In The Usa

Business Records Requirement Guidelines In The Usa

July 11, 2022 Off By Glespynorson

Business owners are to keep an eye on a myriad of things, including how their records are kept. Businesses will generate lots of documents during its day to day activities. As a business owner in the United States of America, you are required to keep all of these records to monitor your business effectively. This is where business record-keeping comes to play.

What is Record-keeping?

Record-keeping is the act of maintaining complete, accurate, reliable transactions and events in the form of recorded information. It involves what information is stored, how they are stored, and how long it can remain stored.

What are the Business Records you Should Keep?

  1. Financial records: This includes documents that show all business transactions. E.g., income statements, bank statements, credit card statements, invoices and receipts, and tax records (payroll, business taxes).
  2. Legal documents: These include certificates of incorporation, all documents that affirm your business’ legal stance, memorandum of association, articles of organization, meeting minutes, stock ledger, Buy-sell agreements, Legal correspondence, Partnership Agreements, etc.
  3. Permits and licenses: The state and local governments may require various permits and licenses before you can start a business. Examples of professions requiring permits and licenses include doctors, dentists, cosmetologists, investment advisors, etc.
  4. Employee information and records: These should contain basic details of the employee, their contact information, training checklists, background checks, performance reviews, etc
  5. Insurance documents: One needs to purchase various insurances when running a business. E.g., renter’s insurance, cyber insurance policies, business income insurance, workers’ compensation insurance, and business liability insurance.

What’s the Best Business Record-Keeping System?

The IRS does not mandate businesses to use a particular record-keeping system. You can use any type on the condition that it clearly shows inflow and outflow. There are two types of business record-keeping systems:

  1. Manual record keeping: Here, business records are maintained by writing, without a computer. Small business owners commonly use this system. Either preformatted books or ledgers can be used for records. At its simplest, for expense incurred, a brief description of the expense, the date it was generated, the amount, and who paid it is written. Similarly, the sales log includes a brief description of what was sold, the date, type of product, and the amount of each sale. This method of record-keeping comes with several advantages, including low cost of operation, easy usage, and less risk of having corrupted data. However, aside from being slow, this system is prone to errors.
  2. Automated record keeping: Here, business records are preserved by electronic imaging or some other electronic storage media.

Importance of Business Record-Keeping

  1. It helps monitor the smooth running of the business: Good records can reveal if a business is making headway or not. It can tell which items or service is selling and which are not. Having this knowledge can direct you on the appropriate changes to make to the business. Thus business that keeps good records has a higher chance of success.
  2. It maintains organized records: With a sound record-keeping system, all vital information is not just properly organized but they are stored in such a way that bits of information can easily be retrieved when needed. When information is properly organized, you can clearly understand the finances the business has accrued.
  3. It aids in preparing financial statements: Good records are needed to make accurate financial statements. There are three kinds of financial statements.
  4. Balance sheet: It gives an insight into the business assets, liabilities, and the company’s stockholder’s equity).
  5. Cash flow statement: It accounts for how a company generates cash from its day-to-day activities and funds its operating expenses and investments).
  6. Income statement: shows the income and expenses of the business for a given period.

Basic Record Keeping Requirements For Your Small Business -

These records can aid in dealing with banks or creditors and also help determine the business’s performance.

  1. It aids in smooth tax filing: Businesses are mandated to file taxes yearly. Having a sound IRS record-keeping system in place not just keeps you prepared for taxes but also makes the tax filing process easier for your prospective tax professional; since you can present different documents, invoices, and receipts. This can also save time and make you discover some possible write-offs.
  2. It enhances the chance of attracting investors: Often, investors may want to know the financial performance of a business before they can invest. This is where having good business records comes into play. Financial records such as Balance sheets, income statements, and cash flow can give investors all the details they need. A sound record-keeping system will provide a prospective investor with accurate and up-to-date information about the business’s financial performance. Hence, they can make better, well-informed decisions on their investment plans.

IRS Record-keeping Retention Guidelines

According to the IRS, the length of time to store a document depends on the action, expense, or event the document records. You can keep financial records for seven years. Tax records could be kept between 3-7 years. Employee records should be kept as long as the employee is still in the company. But upon employment termination, the record should be kept for at least seven years. Also, if you compensate an employee for an injury sustained at the workplace, you should keep that record for up to ten years. On the other hand, you should keep legal records indefinitely.

In conclusion, an excellent record-keeping system increases the chance of success of a business. The IRS recommends no specific business record system. You can use any method of record-keeping, provided the system can show an accurate account of expenses and income incurred. The duration of information that can be stored in a record system is dependent on the action, expense, or event the document records.