Recordkeeping is usually one of the tasks that people do not like to deal with. However, recordkeeping is very important to your business. Good records will help you do the following:
- Monitor the progress of your business
- Prepare your financial statements
- Identify source of receipts
- Keep track of deductible expenses
- Prepare your tax returns
- Support items reported on tax returns
Make a profit. You need to know how much you are spending on your business to keep it running in order to know how much income you need to have a profit. For example: "How much do I need to sell my widgets for?" Always keep good records of the costs of taking your widget to market. You can then avoid having a business that loses money each time you sell a product.
Calculate your lowest net profit subject to tax.
You cannot deduct expenses that you approximate or estimate. You must be able to prove
(substantiate) your business expenses with timely and accurate records to support the
amounts deducted to compute your net profit. Refer to:
What is the burden of proof?.
Borrow money from a banking institution or other commercial lender. These lenders are going to check your credit and they will want to see your projections to repay the loan.
Separate personal from business. Transactions between related parties, i.e., a corporation and its sole shareholder, may be subject to special scrutiny. To facilitate your tax preparation and reporting, as well as your responses to any possible IRS inquiries, it may be beneficial to record and store your documentation of any transactions between related parties.
