Small Business Bookkeeping Deadly Sin #7: Not Recording Enough Information About TransactionsKelly
It’s not just receipts, bank statements and computer records small business owners take to their accountants at tax time.
They also bring along a bad memory! Not even the most diligent business owner has a perfect memory, and trying to overly rely on memory is why failing to record enough information about transactions is our seventh deadly sin.
It is essential to record enough information about a transaction so that anyone can easily understand the transaction that occurred. For taxation purposes, you are legally obligated to keep records that specify and explain all transactions in your business. This includes all documentation relevant for determining your tax liabilities.
Previously, business owners would struggle to achieve this if they forget to record the payee’s name or the amount paid on their cheque stubs. They could find out from bank statements (when they arrived), but they would still be in the dark as to who had paid. The only way to find out was to pay for the information in the bank branch.
Nowadays, with most transactions taking place on line, the situation is very different.
Despite that, it is still possible to be caught out without all the correct information when reviewing your records with an accountant. For anyone who has found themselves in this situation, it can be alarming and is always difficult to track down the relevant records when it happens.
Picture this scenario.
Your accountant is preparing your end of year accounts and tax returns and asks what a transaction of $2000 in July of the previous year was for. You actually don’t remember what the transaction was for, so you have to try and hunt down the invoice. You know that you had paid it to an office supplies company, and that it was for $2000, but other than that – you just have no idea. Your accountant tells you she needs to know whether the purchase was tax deductible or whether you need to depreciate it. After a full hour of rummaging you finally find the invoice and can see that it was for a replacement photocopier. Had you just recorded this information straight into your accounting program in the first place, this problem would have been avoided altogether.
Cashflow Manager has a dedicated “Details” for recording explanations of your transaction that you can refer to at any time and fully understand the nature of the payment. The best time to record this information is right away – while it’s still fresh in your mind. Doing so, without dilly-dallying will save you both time and anxiety should your accountant ask you about it later. Plus it can save you money down the track, because every second your account spends chasing up missing information about transactions are seconds you will be billed for!
If you ever get audited, it could be very embarrassing – not to mention unnecessarily costly – if you’re unable to answer questions about your transactions and tax liabilities that the tax inspector might ask. Not recording the type of insurance against insurance payments is another common issue. To save yourself a lot of time, Make sure you record the property’s name, the type of cover it has, and the details of the person.
There are plenty more examples, but the key thing to know is: you should be recording all the details if the transaction wouldn’t be immediately obvious to anyone who isn’t already very familiar with your business. In the end, taking this small step can save you hours with your account, remove stress from your end of financial year and save your skin if you happen to audited.
Stay on the righteous path with the eighth deadly sin in our series: not keeping proper records for employees.