Accounting is one of the most crucial areas of your business. A good recordkeeping system can protect you in case of a government audit. Reliable financial statements can give you insights into how various parts of your business are performing. Picture accounting this way: accounting is the basic language of business. If you cannot speak the language, you will flounder.

Record Keeping
At a minimum, you should have a separate business checking account for your business. All revenue and business-related receipts should be deposited timely (that is, within a couple days of receipt, if not daily) into only the business account. You should not pay personal bills from the business account, nor business bills from your personal account. The IRS and other government agencies will scrutinize you more carefully if they find that you are mixing business with personal - or they have the option to disallow all disbursements as personal expenditures unless you can prove otherwise! Good documentation will give you a more accurate picture of your company's performance, and will make tax audits less painful.

Most accountants recommend double entry bookkeeping, with a general ledger. However, very small businesses can get by with a "one write" system. The one write system allows you to record a check, deposit or receivable once, with a carbon copy carried onto a ledger or tally sheet below it. It allows you to keep a running balance on bank account cash or receivables.

There are several files you should maintain. You will need personnel files on each employee (see the Personnel section of this web site). You should also keep receivables and payables folders, which should be reviewed weekly to determine which items need attention. Once bills are paid, you should keep the paid invoices. Paid receivables should be filed both numerically and alphabetically. The government will review billings by numerical order to determine if there is any unreported income. By also keeping billings alphabetically, you have a mailing list for additional sales. Retail stores should keep the "Z" tapes each day, and develop a summary report form that reflects the receipts and payouts for the month.

It would be helpful in an audit to keep a separate file of W-9 forms and 1099s issued to vendors and contractors. You should also keep copies of all sales, payroll, property, income and other tax returns. In addition, you should keep all bank statements, canceled checks, and bank reconciliations.

How long should you keep these files? As a general rule, plan on maintaining the files of billings, invoices, bank statements and other supporting data for seven years. Tax returns other than income tax returns should also be kept for seven years. Income tax returns should be kept indefinitely. Even upon sale of a company, you should keep copies of the income tax returns.