Record Retention
Record Retention is important to any business and can be done using a cloud-based solution or manual record keeping in a file system. Maintaining your records on your businesses revenue and expenses assist in ensuring that you have the appropriate audit trail, and you have the ability to review transactions to ensure that your income and expenses are being reported accurately.
Why is this important, well for example if you have accidently reported a revenue stream twice this will over state your income meaning this will overstate your tax liability and vise versa if you understate your revenue stream and or overstate your expenses you could understate your tax liability. In either of these cases this could cause you to underpay or overpay your tax liability, and or in either case if you were audited could cause additional penalties and fees and cause you to pay higher record keeping cost if you are required to have a third-party auditor monitor your books.
How you maintain your records will depend on how much space you have, and if you prefer to have paper records or if you are okay with scanning your documents into a cloud-based system. For retention of paper documents, you will need to purchase a filing cabinet, when I first started I was able to find a free filing cabinet on craigslist you don’t need anything fancy as long as you can file your documents. If you don’t want a complicated system, the easiest way to file is by month, example: January, you will put your bank and or credit card statements along with all sales invoices and expense receipts in a folder for that month, you will do this for every month afterward. For reconciling see our article on Basic Bookkeeping, as you grow you will start making a folder for each, bank and credit card statements, sales invoices, and expense receipts, you might even want to start making a folder for vendors that you use more frequently, this will also help you assess expenses to determine if it is time to start purchasing wholesale or on terms.
Once you’ve started growing you will want to organize your filing accordingly, you will have a drawer for expenses in which you will now start filing alphabetically and for vendors you purchase from frequently they will have their own folders. If you have term accounts, you will want to make sure that you have placement in the front of your cabinet for invoices not paid and as you pay them you will move them to the appropriate folder.
If you don’t have space for file cabinets, you might want to think about cloud-based solutions that allow you to have multiple folders, Google Drive is a good low-cost option and it is connected to your email, you can set up separate drives for clients or just use folders. Other options you have drop box and one drive, if you don’t have a printer with a scanner, you can download Adobe Scan on your cell phone and scan documents then allocate them to the appropriate location. Cloud-based record retention is the easiest, because you can access a document from anywhere and if there is a natural disaster in your area or you move you don’t have to worry about losing any paper documents.
Which ever method you choose you just need to make sure that you retain your records for the appropriate amount of time, in case of audit Federal is 7years, you will want to check your state, and you will keep your records for which every entity has the longer period of retention.