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Business records you should keep
Keeping accurate and up-to-date records is vital to the success of any business. It is also a requirement under taxation laws.
Record management can help your business by:
- assisting in preparing financial statements quickly and accurately and providing information to enable the control of cash in a business. This provides information for management to base business decisions on
- measuring the current business performance against the projections that were set down in the business plan
- highlighting areas where problems could arise and enabling remedies to be put in place promptly
- fulfilling obligations under taxation law
- assisting in calculating how much tax you have to pay
- assisting in providing information required by your bankers
- helping in detecting fraud within a business
- providing valuable information and details for the future sale of your business if required
- increasing the chances of the business operating successfully
- identifying where your business can save costs.
For example, it is no use finding out six months down the track that a particular product has been selling at a loss, or that your sales are 50% less than what was in your budget, or that you are owed $50,000 more than expected. Good alphabetical record keeping can help you monitor and plan to avoid these situations.
What records should you keep?
Any record keeping system should be accurate, reliable, easy to follow, consistent and easy to use.
The following basic records can form your record system.
Records of cash movement
This can usually take the form of a cash book or financial accounting program that records cash receipts and cash payments. It is also important to keep a record of your bank account, which will include cheque books, deposit books and bank statements.
Records of sales
Depending on the type of business that you conduct, the records needed to record sales and sales movements could include invoice books, receipt books, cash register tapes, credit card documentation, credit notes for goods returned and a record of goods used by the business owner personally. You may also have a system whereby the sales that are made to your clients who run accounts are recorded to provide the client's name and address, the amount owing by the client, details of sales to the client and the length of time that their credit has been extended.
Records of purchases
All records need physical receipts (hard copies). These can include cheque butts to show the larger purchases, a petty cash system for recording smaller cash purchases, receipts obtained for payments made, credit card documents relating to purchases, invoices received as confirmation of purchases and any other documents relating to purchases including copies of agreements or leases. There may also be a need to maintain a system to record all creditors (people your business buys from), including the creditor's name and address, the amount owed to them, the details of the purchases from them and when the amount is due for payment.
Records of expenses
Expenses are other than the normal purchases of the business and are shown by having cheque butts, receipts, cash register tapes, copies of statements and invoices, credit card documentation, details of payments by cash and log books that record other expenses.
Records of details of staff and wages
These records show full details of wages, employment contracts, tax deducted, fringe benefits, superannuation and details of related matters such as sick pay and holiday pay. Generally you can use whatever format best suits the business, but it is important to make the records comprehensive and clear in case of any disputes.
Other records
It is also advisable to keep stock records, accounts receivable, accounts payable, and other basic accounting records such as the various accounting journals-what are called basic books of account.
Records required for the end of financial year
Stocktake
Businesses always need a record of stocktake. It is a requirement that stock on hand at the beginning and end of the year be taken into account when working out whether the business has a taxable income for tax purposes. Trading stock includes anything produced, manufactured, acquired or purchased for the purpose of manufacture, sale or exchange. Also, if you are a primary producer, it includes livestock.
List of debtors and creditors
Ask your accountant about the information you need to give them showing details of all your debtors and creditors for the period.
Depreciation
Keep records of transactions relating to the depreciation (or wear and tear) of assets. Taxation law allows you to claim an annual deduction for wear and tear of items used to produce the income shown in your tax return. The items that can be depreciated are numerous and there are different rates for depreciating them. The records you need to keep include original purchase agreements or tax invoices, a depreciation schedule, the cost of transporting the items to your business (if applicable) and installation costs (if applicable).
How long must records be kept?
The question of how long records need to be retained is set in most cases by law. For example, income tax records must be kept for at least five years, or for a longer period if the business so requires. It is always a good idea to keep permanent records such as fixed assets acquired, employment, company constitution and minutes. In addition, there are other records that you may need to keep which confirm transactions.
When starting a business
When starting a business it is recommended you keep on file such records as:
- sale and purchase contract
- loan agreements
- rental agreements
- lease agreements
- franchise agreements
- sale and lease back agreements
- trading agreements with suppliers
- legal documentation
- evidence of deposits with utilities
- contracts with telephone companies
- business name registration certificate.
When buying a business
When buying a business it is recommended you keep on file such records as:
- profit and loss statements
- balance sheets
- bank statements
- sale and purchase contract
- legal statements
- debtors and creditors
- schedule of assets
- franchise agreements
- lease agreements
- calculation of goodwill
- business profile
- all correspondence involved in the transaction
- final settlement statement
- schedule of stock and work in progress
- schedule of materials
- management agreements
- company documentation, if company is taken over
- business name transfer certificate.
Your legal responsibility
Under taxation law, anyone carrying on a business must keep certain records to explain their transactions, for example profits for tax purposes. These records must be kept in English and must be sufficient to enable the Australian Taxation Office to ascertain the correct taxable income of that person or company. These records must be retained for at least five years from the date of lodgment and must be kept where they can be referred to if necessary.
If claims are made with the Australian Taxation Office, it will also be necessary to keep receipts that verify payments and deductions made, showing the date of receipt, name of the supplier, the amount involved and a description of what has been bought. For smaller expenses, receipts are not necessary as long as a record is kept in the form of a diary showing the date, amount and purpose. All invoices generated and received need to state the words 'tax invoice' and detail the relevant Australian Business Number (ABN).
In today's dynamic and competitive marketplace, you can no longer afford to run a profitable business without proper and complete business records. Well kept records are management tools that help you minimise losses and manage cash.
Your accountant or business adviser can assist you in setting up a system so that every area of your business supports good record keeping management. Good records can also form the source of information that is passed over to your accountant for the completion of financial figures and tax. The accuracy and tidiness of these records may lower the costs for your accountant's services. Also, if you decide to sell your business, the fact that you have good records can weigh heavily in your favour in obtaining the best price.
