For the individual just going into business, experience clearly indicates that an adequate record keeping system helps increase the chances of survival and reduces the probability of early failure. Similarly, for the established business owner, it has been clearly demonstrated that a good record keeping system increases the chances of staying in business and of earning large profits.

It is practically impossible to negotiate for a business loan from a bank without properly prepared financial statements. It may even be difficult to secure credit in any form without statements. Bankers and other credit grantors need to study the business owner’s balance sheet and income statement in order to decide whether credit should be extended. Sometimes audited financial statements are required; the record keeping system must provide the basis for these statements.

Requirements by federal and local government agencies for adequate records are as important as the management and credit importance of financial statements. The responsibility for maintaining records and proving their accuracy falls on the taxpayer. Federal and local income taxes, payroll taxes, sales taxes, personal property taxes, and an increasing number of other laws and regulations require certain reports that are easier to prepare and substantiate if the figures are organized by a good record keeping system.

Records backing up government requirements must be available during the audit period. Record retention will depend upon the statute of limitations set forth by local and federal law. It is important to consult an attorney to determine the requirements of governing statutes. Due to the cumulative volume of required records, storage and retrieval can become burdensome. Many business owners are microfilming their old records and microfilming service centers are being called on to solve this problem.

A number of “one-book” record keeping systems are available. Some are prepared with instructions and forms designed for specific kinds of businesses, while others are for small business use in general. Some trade associations, manufacturers and wholesalers offer specially designed record keeping systems to meet the general needs of a large variety of retail and service establishments. The owners of a business will often find it desirable to obtain specialized assistance to help them adapt such systems to their special requirements.

There are several copyrighted systems providing simplified records, usually in a simplified record book. These systems cover the basic records with complete instructions for their use.

The Small Business Administration (SBA) has a publication, FM10 “Record Keeping in Small Business,” that lists many of these systems. Copies of this publication may be obtained from the SBA by going on-line to www.sba.gov/library/pubs.html

In order for a record keeping system to be useful it must be simple to use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis. To keep effective records you must be able to:

• Identify your earnings for self-employment tax purposes
• Identify the source of a receipt
• Keep track of all deductible expenses
• Figure depreciation allowance
• Take advantage of capital gain and loss laws
• Support items on your tax returns

There are four basic types of records that most firms keep:

• Sales records
• Cash records
• Cash disbursements
• Accounts receivable

If you do not have the necessary experience, it is recommended that you consider hiring a certified public accountant to develop your record keeping system.

Public accountants also render other accounting services such as auditing, preparation of reports for government agencies, tax planning, analysis of financial reports and a variety of specialized management advisory services.

Accounting Systems

Computerized accounting is the way most accountants do your monthly books each month. If you desire to do your own books, you should consider an accounting program for your record keeping. There are several good accounting programs available at office supply retailers. Accounting systems range from simple and inexpensive to powerful and rather costly. Some of the available options include the one-write system, a ledger-less system for accounts receivable and accounts payable, standard ledgers and journals, prepackaged services provided by banks and service bureaus, bookkeeping services, and accountants. With this wide variety of options it is important to choose a system that you can understand and feel comfortable using.

The accounting system you choose should meet the needs of your business situation and at the minimum meet the following objectives:

• The system should yield an accurate and precise picture of the operating results
• The records should provide a convenient basis for comparing current data with previous year’s operating results and budgetary goals
• The financial data should be presented in a format that is useful to prospective creditors, bankers, auditors and management
• The accounting records should reflect losses such as theft and bad debt
• The accounting process should include compiling and filing reports and tax returns
• The accounting records should be able to substantiate the value of fixed assets for insurance claims, in the event of a loss
• The United States Securities & Exchange Commission requires most publicly held corporations to file certain annual and interim quarterly reports

The accounting system you choose can be established on an accrual or cash basis. In a cash system the accounts are debited and credited as cash is received and paid out. In an accrual system, the income earned and the expenses incurred are recorded when the sale is made or whenever the expense is incurred. The accrual basis of accounting allows the matching of revenues and associated expenses. Due to this matching, the accrual basis is generally considered to be a more accurate and up-to-date statement of profits.