15 Steps to help you stay out of trouble with IRS – Part 2 of 3

This is part 2 of 3. If you own a business, keeping a set of books and records is not optional. Unfortunately, most business owners are not shown what “books and records” are, let alone how to keep them. This is the 2nd part of a 3 part serices on creating a bookkeeping system built on Bedrock!

Step 6

Create Your Chart of Accounts

Your chart of accounts is the backbone of your bookkeeping system. The chart will list the categories and subcategories in the same order as they appear in your financial statements.

  • Create a list of all the categories and subcategories as they appear on your Balance Sheet and Income Statement.
  • Create an organized numbering system assigned to each category and subcategory to further organize your chart.
  • Leave sufficient gaps between the numbers to allow for additional categories.

Sidestepping the chart of accounts will lead to sloppy, inefficient financial reports. Your chart needs to be well organized. Structure your chart in a way to provide the information as you & your accountant need to review it on your financial reports. For example:

Insurance

Auto

Truck

Liability

Umbrella

Professional Fees

Accounting

Legal

Step 7

Create Your Transactions Processes

Your transaction process are the steps taken to consummate a transaction from start to finish. Capturing and recording the information from those transactions is called a bookkeeping process. An efficient bookkeeping process will employ the information gathering along with the transaction process.

Make a list of each type of transaction you will conduct. For each type of transaction list the following information

  • Who initiates it?
  • Where does it take place?
  • How is it documented?
  • Who obtains the document?
  • Where is the document sent to be recorded?
  • Who records the transaction?
  • Who files the document?
  • Where and how is it filed?

Review the list with your accountant and determine what your bookkeeping processes will be. Create an item mapping listing which category each transaction will be posted to. IE: Staple-Office Supplies, Hess-Auto:Gas, XYZ Realty-Rent

Your Transactions Processes

  • A documented transaction process is your bookkeeping instruction guide.
  • A well-thought-out, documented process will help reduce and eliminate financial discrepancies and mistakes.
  • There is a beginning and an end to every transaction.
  • Know and understand every way you will conduct your business and record your transactions.
  • Hold individuals that are responsible for each step in the process accountable.
  • If the transaction process breaks down, identify where the weakness exists and make corrections.
  • The process to record and document each transaction must be thought out in advance with precise instructions on how to record it.

Step 8

Create Your Recordkeeping System

Create an organized, easy to understand record keeping system. It is essential in maintaining a good set of books and records.

Review the section in IRS publication 583 Starting a Business & Keeping Records.

https://www.irs.gov/pub/irs-pdf/p583.pdf

Decide on a paperless or traditional file system.

Organize your file system into these categories:

Permanent

Tax return.

Payroll

Employees

Tax payments & forms

Other

Insurance

Vendors

Customers/Clients

Other

Create Your Recordkeeping System

  • IRS Publication 583 will provide detailed rules on record keeping.
  • Your payroll, vendors and customer/client folders should be segregated by year and each document filed in chronological order.
  • Your bookkeeping system includes your record keeping system.
  • Your documents backup and verifies the transactions recorded in bookkeeping system.
  • Your books and records must clearly reflect what is reported on your financial reports and tax returns.

Step 9

Paperless File Systems

Electronic file systems are the norm in today’s business environment. The cost of printing, storing and handling paper documents is costly and vastly inefficient. Creating a virtual file cabinet with a strong naming convention will enable you to access any document in your system while still complying with record keeping requirements.

  • Choose your software for maintaining a paperless filing system. IE: Google Drive, DropBox, Etc.
  • Learn about the different file formats you can save electronic documents in. IE: PDF, XPS, Etc.
  • Choose a scanner to convert your paper documents into electronic format.
  • Create your process for saving and maintaining your electronic documents.
  • Create a strong naming convention that will allow for quick retrieval.

Paperless File Systems

There are 3 components to a paperless file system convention:

Format

Location

Naming

  • Create a system that integrates with your bookkeeping system.
  • Keep your electronic documents well organized.
  • Your electronic file system should mirror your traditional file system.
  • You will always have paper documents such as insurance policies, ownership titles, etc.
  • Create an electronic version of any paper documents you still have to keep.

Step 10

Decide On Your Bookkeeping Platform

QuickBooks is the default choice for many small business owners but it is far from being the only choice. The most important factor is choosing the platform most appropriate for you and your business.

  • Working with your accountant decide on a platform that meets all of your bookkeeping objectives.
  • If you decide to use QuickBooks or any other software program obtain adequate training and support.
  • After implementing your system confirm that it is producing the desired results.

Decide On Your Bookkeeping Platform

  • There are a good deal of bookkeeping software options in addition to QuickBooks.
  • Check out www.waveapps.com
  • Check out www.xero.com
  • If you use any software, obtain training and support.
  • Most small businesses don’t require complicated software.
  • Select a platform that works for you.
  • Sometimes a simple manual system will suffice.
Joe
Joe

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