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Rhode Island Legal Blog

Friday, April 6, 2018

Financial Records and Your Business

In starting a business, entrepreneurs are inundated with paperwork, legal requirements and numerous planning meetings. While most of these activities seem burdensome, many business owners cite financial management and record-keeping as the most daunting task of daily operations. With some businesses having thousands of transactions each day, coupled with expenses and employee payroll, it should come as no surprise that business financials can be overwhelming. With so many documents and figures, it can be difficult to stay organized and leads many business owners to question what they are required to keep and what they can simply discard.

The Basics in Understanding Your Business’ Financial Health
While it may be tedious, maintaining organized and balanced financial records isn’t an option for businesses, it’s a requirement. Not only may you have to produce these records if you are audited by the IRS but it’s likely that creditors, your bank and future stockholders will want to see these records for insight into the health of your business. Having a solid record-keeping plan early on will save you a great deal of time and energy down the line when you are asked to produce financials for your company. As a general rule of thumb, business owners should produce, and regularly review, the following:

Balance Sheet - Simply defined, this statement summarizes your company's assets, liabilities and shareholders' equity at any given time. It is in essence a snapshot of your company's financial health, showing the net worth of the business.

Profit and Loss Statement - This statement summarizes the revenues, costs and expenses incurred during a set period of time (most businesses do this on a quarterly basis but some even do a monthly report). It indicates how well the business is doing in terms of buying and selling inventory (or services) and ultimately showcases profitability.

Cash Flow Statement - This document reports the cash generated and used during a set time frame. Some business models are based upon cash flow and in these cases, this report may be paramount in understanding the well-being of the business.

Financial Record Retention
While certain types of business require that special records be kept, most are not required by law to maintain a definite set of documents. As a general rule of thumb, the IRS recommends that businesses keep the following records:

Gross Receipt Documentation

  • Cash register tapes
  • Bank deposit slips
  • Receipt books
  • Invoices
  • Credit card charge slips
  • Forms 1099-MISC

Purchase Documentation

  • Canceled checks
  • Cash register tape receipts
  • Credit card sales slips
  • Invoices

Expense Documentation

  • Canceled checks
  • Cash register tapes
  • Account statements
  • Credit card sales slips
  • Invoices
  • Petty cash slips for small cash payments

Travel, Transportation, Entertainment, and Gift Expenses (only if you plan to deduct these)

Asset Documentation

  • A record of when and how you acquired the assets.
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions taken for depreciation
  • Deductions taken for casualty losses, such as losses resulting from natural disasters
  • Documentation on how the asset was used
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale
  • Employment taxes

There are specific employment tax records you must keep for at least four years. It’s important that all business owners, and their accounting teams, review IRS guidelines for more information on these records.

There are different requirements when it comes to how long records must be retained. In determining the best financial management and record-keeping solution, it’s imperative that you contact a business law attorney to discuss your options and ensure compliance.


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