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Record-keeping for small businesses involves maintaining accurate accounts and evidence of all of your business’ transactions. Keeping records allows you to have a general idea of how your business is doing. For example, you might determine what products are selling most, which are not selling well, and how much profit you are making per sale. In addition, records will provide you with the data needed to prepare financial statements and tax returns for your business. Always try to keep records of the following items:
1. Expenses. Opening a business checking account is a great way to keep track of expenses. A checking account will give you the exact date, quantity, and expenses incurred by your business throughout the month.
2. Income. At a minimum, you should record the type of payments received, dates received, and the source of payments. Remember that business income may come from selling goods and services, selling an asset (e.g., a car) to finance your business, or dividends received from investments.
3. Inventory. Always keep an accurate record of your inventory at hand. Update inventory records frequently; as soon as an item is sold, remove it from your inventory account.
4. Payroll. Regardless of the number of employees your business has, always keep adequate payroll records with your employees’ personal information, hours worked, and the wages earned. Prepare Form 941 (the Employees’ Quarterly Federal Tax Return) every quarter, which totals each employee’s withholdings for federal taxes and Social Security. You also have to prepare the W-2 form every year for each employee, summarizing their total earnings and withholdings for the year.
Always keep your personal financial records separate from your business records. It is also very important that you keep business records for at least three years because the IRS has the right to audit any transaction that occurred during the prior three years in most states.
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