Basic Record Keeping
Keep copies of original documents such as invoices, deposit slips, bills, and receipts, all of which should show the date, dollar amount, and description of the transaction, including the vendor. If possible, include the name and address of the vendor and also your business name and address. Write any missing details down on, for example, the cash register tape. If the transaction doesn't come with a receipt (such as a parking meter charge), note down the details in a logbook or on a sheet of paper that can be included in your accounting records.
You also need to keep bank statements, cancelled checks, and computerized records — essentially, if it applies to your finances in any way, keep it. And then organize it: Filing expenses by account and by month, for example, makes it easy to find a receipt if you ever need to refer to it again.
Turning Paperwork into Records
All of the paperwork that involves receiving or spending money needs to be translated into records. You'll do this by entering the transactions into a revenue and expense journal, which can be either paper- or electronic-based (although the latter is much more efficient). This should be done at least weekly. Each income and expense transaction is assigned to a specific account (such as Gross Sales or Office Supplies).
Creating Accounts
The tax forms that you use to report your business activities to the government are a good place to start when you're figuring out what your own income and expense categories should be. They include expenses such as advertising, bad debts, commissions, insurance, office supplies such as computer paper, and travel.
There's a definite advantage to using the government's categories for your expenses: If you use the tax software that's produced by the company that produces your accounting software, your accounting records can be imported directly into the tax software — it automatically translates it into the correct lines and accounts, saving you time.
Tracking Inventory
Retail businesses will also need to keep track of their inventory. This includes merchandise that's ready for sale, raw materials, work in progress, and any supplies (such as packaging) that physically become part of the item for sale. You must be able to identify and value your inventory items, and you need to know the value of the inventory at the beginning and end of each tax year. Keep in mind that if you maintain inventories, you'll need to use the accrual accounting method.
Daily Sales
Retailers with daily receipts should clear the cash register on a daily basis, tracking taxable sales in order to pay sales tax based on your state and city's regulations. Deposits should be made daily or weekly, as appropriate — don't let your revenue sit around the house to get lost or stolen.
If you need to deposit cash sales, be security conscious. Make the trip to your financial institution during daylight hours, preferably during its opening hours (to avoid using outdoor deposit chutes), and avoid making the trip at the same day of the week or same time. Don't make it obvious that you're carrying cash — avoid making yourself an easy target for robbery.
Capital Assets
Keep particularly good records of assets that will be depreciated over a certain number of years, including vehicles, computers and office furniture. These “capital” assets aren't expensed completely when they're purchased because their life extends over a period of several years. Depreciation (sometimes called “capital cost allowance”) allows a certain percentage of the value of these items to be expensed each year instead. In the United States, you may have a choice of deducting these items as an expense when purchased or spreading the expense over a number of years through depreciation. In Canada, you have no choice — it's depreciation.
Business Versus Personal Use Logbooks
For assets that are used for both personal and business purposes (such as vehicles), you'll need to maintain a logbook of activity, noting when and what the use was and its purpose (e.g., odometer readings showing ten miles driven between your home office and a client's office for the purpose of signing a new contract). At the end of the year, you'll calculate the percentage that you used the asset for business purposes. Once you've totaled up the expenses for the year, you multiply the total by your business percentage and that's how much you can claim for tax purposes. If you're audited, your logbook will become essential evidence that your expense claim is reasonable.
Other Records
If your home phone doubles as your business line, it will be useful to log your business calls, including noting long-distance calls. A petty cash log to track small cash purchases that are business-related can also be useful. For travel expenses, separate meals and entertainment costs, and record the name of the client and the purpose of the trip.
