The most important rule in record keeping for the small business is this: Open a separate checking account for your business and use that checkbook as an audit trail to record all business activity! Without a separate business checking account you cannot possibly keep track of your income or expenses and you are asking for an unfavorable audit.
If you use the following methods you will find that 99% of your record keeping requirements are being fulfilled. It will also reduce the cost of accounting and tax preparation services.
1. Only use a company check to pay for business expenses.
Do not use the company checking account to pay for personal expenses. If you are a sole-proprietor you should write a “draw” check to yourself and deposit it in your personal checking account. If your company is a corporation you should write yourself a payroll check and deposit it in your personal checking account. Pay your personal expenses out of your personal checking account.
2. Keep one credit card for business use only.
Sometimes it is not convenient to pay with a company check such as at a business luncheon. In these cases you should pay using a credit card that you use only for business purposes. This credit card does not have to be in the company name. For example: you can decide to use your MasterCard for personal purchases and your Visa for business purposes. Just make sure that you use each card for only one type of expense.
When you receive your monthly statement for the “business” credit card, pay for it with a business check. By doing this you are keeping track of all business expenses through the company checking account.
3. Turn in a monthly expense report for cash purchases and business mileage.
Every month you should turn in an expense report for business expenses paid for by you and be reimbursed with a company check. You should also turn in a report of business mileage driven on your personal cars and be reimbursed at the maximum IRS rate (48.5 cents/mile for 2007). Once again, by doing this you are keeping track of all business expenses through the company checking account.
1. Only business income should be deposited in the business checking account.
The basic IRS rule is that all money deposited in a business account is assumed to be taxable income unless you can prove otherwise. Therefore, if it is necessary for you to put money into the business checking account that is not taxable such as the initial deposit from your personal funds or loans from a bank, you should deposit those amounts on a separate deposit ticket and make a memo entry identifying the source of the funds.