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Recordkeeping is the act of keeping a log of information for a specific purpose that can be financial, operational, legal, and regulatory. They can be kept on paper and created manually, or they can be kept in electronic form. The information collected is kept for later referral, tracking purposes, and proof that an action was taken. Recordkeeping is vital for small business owners as the practice helps them keep an eye on the overall operation of their business. Following is a look at what small businesses need to know about recordkeeping and why.
What is Recordkeeping?
The simple act of writing down information in a detailed or abbreviated manner onto paper or in a computer is recordkeeping at its most basic. You’re engaging in the action of recording facts, numerical data, and comments into a written record. The record is then kept for retrieval at a later date for any number of purposes. This information is valuable at the time of its recording, but it can become invaluable at a later date when information is missing elsewhere or proof needs to be provided in response to an inquiry. It’s also an excellent method for looking back at the history of a company to see how it’s changed over the years. Small businesses benefit greatly from recordkeeping because the “books” are often called upon to provide proof for everything from getting a bank loan to audits from various agencies.
The steps of recordkeeping include:
• Identifying the information to be recorded.
• Entering information into a journal, log, or ledger.
• Classifying the type or nature of the record.
• Posting into the ledger for financial information.
• Preparing a statement based on the information (can be financial or operational).
• Breaking down the information into an easily-read format.
• Delivering and communicating information to stakeholders.
Recordkeeping involves compiling information of any kind that relates to a business and recording it in software or a general ledger. For example: you’ve paid someone for their labor with a check, and took taxes out per legal requirements. The payment is entered into a ledger for tracking payroll, entered as a subtraction in the bank account, and also entered into a ledger that tracks the payment of payroll taxes. On the surface, this sounds like accounting, but accounting is also a form of recordkeeping. The difference here is that you’re keeping a record of a paycheck that you issued, made sure to enter it into the checkbook for later reconciliation, and made sure to record the federal and state taxes for remittance.
There are multiple types of recordkeeping that apply to small businesses, but the exact types of records that need to be kept vary. A business that operates heavy equipment and is required to hire licensed operators is one that has to keep operational logs to track who had control of a machine on a specific day and time. In contrast, a law office needs to track billable hours, client information, safekeeping of property, and other processes related to the practice of law.
What are the Different Types of Recordkeeping?
There are multiple types of recordkeeping, and they all apply to a specific function or division of a business. The types of records that you keep for your business are dependent on the needs of the business. Following are the most common types of records needed for a business:
This type of recordkeeping covers the founding, progression, development, and activities of the business at large. There are two types of recordkeeping under this category, and they include policy and operational records.
Policy records include:
• Organizational: The records that outline how the business operates such as plans, rules, or techniques.
• Governing: Any directive that’s been generated or issued from the business owner and their managers or other people of authority.
• Reporting: Any report that results in a summary statement, special event, meeting minutes, progress report, and any document that relates to the overall operation of the business.
Operational records are documents that outline the policies and procedures of the business. They’re guidelines that tell people how to do their jobs, what the company expects in terms of employee conduct, procedures for handling common situations or issues, and directives that lay out how a process needs to be done within the confines of the business.
Financial or Fiscal Records
This covers payroll, accounts receivable and payable, operating budgets and budgets in general, accounting records and reports, and any financial transactions that relate to the operation of the business. The IRS expects a business to retain their financial records for three years, but a small business may want to retain their records going back seven years before disposal. The reason for the timing of record retention has to do with the IRS’ period of limitations for look-back periods when performing an audit.
Legal records are documents that include incorporation papers, a list of company officers and their titles, shareholders and how much of the business they own, and any documents that show ownership of assets. Other legal records include employee information for employment and tax purposes, licenses, permits, and any documents that pertain to the operation of the business. The purpose of keeping legal records is to show proof that the business is operating in compliance with the law and protecting the principals of the business through something known as the corporate veil. The corporate veil protects individuals from being held personally liable for an adverse event or action that happened through the business.
Financial records are the most important type of recordkeeping, but all business records are important at some point. They provide undeniable proof that an action was taken, recorded, then relied upon to track that action. However, businesses generate a lot of paperwork, even small ones, and proper maintenance is key to ensuring the validity and usefulness of those records.
The Different Methods of Recordkeeping
There are two ways to keep records: manually and electronically.
The manual method of recordkeeping is as old as civilization, but modern electronic recordkeeping as we know it began in the 1960s and hasn’t changed much in the intervening decades apart from the technology used to hold records. Both methods are equally valid and accepted at face value. Further simplifying the methods of recordkeeping is the fact that the IRS does not require businesses to use a specific type of recordkeeping. You can use the method that suits your business best, or use both of them for different purposes.
Manual recordkeeping is the simplest method of recording information. All it requires is a pen or pencil and a sheet of paper. Put a title at the top of the page to denote the information that’s recorded on the page, and begin writing. Pre-printed ledgers and logs are available to streamline the process, plus they’re made to be kept in specially designed binders. Once a page is full, simply carry over the information to the next page, then continue the process. Once a binder has been filled, or a year completed, the binder can be labeled and set aside for later reference. Manually keeping records is a time-consuming process. It’s why electronic recordkeeping has overtaken the manual method.
Electronic recordkeeping, or computer recordkeeping, involves the use of a computer and software.There are countless accounting and recordkeeping programs available to the small business owner, and a majority of it runs on just about any computer. Recordkeeping software has an advantage over the manual method in terms of ease of entry, tracking, searching, and calculating. Software reduces the amount of time spent looking for data as well as doing the math. The user spends a lot less time “doing the books” with software than they would with the manual method. Records that were made manually can be scanned
A Look at How to Keep Records
The information you enter into software or onto a piece of paper requires context. That means you need to label the page with the source of the information, then make sure the information itself is clearly defined.
For example: you’re tracking the transactions made in a point of sale (POS) system, and you need to reconcile the balance. The POS records cash, check, gift cards, and credit card transactions. All of these transactions have to be separated into their own categories and their total amounts listed in the ledger. The totals of each section are then calculated, debits and credits applied, then compared against the final amount of money that was taken in by the POS for the day.
All of this information is entered into the recordkeeping books or software in order to zero out or balance the POS system for the next day. Meanwhile, any discrepancies are easily found after the information has been put into the ledger, then resolved by checking the financial inputs and looking for a mistake. The ledger can be then saved for later review and creating a summary statement.
Recordkeeping for OSHA
The Occupational Safety and Health Administration, or OSHA, enforces workplace safety rules across all industries and workplaces. It enforces the laws from the factory floor to the office space. An office space is much less likely to encounter OSHA enforcement for obvious reasons, but it’s not unheard of for OSHA to respond to a complaint from an employee working in an office. However, the agency is more active in operations that use heavy equipment or machinery that has the potential to cause serious injury. Employers that have an employee experience a severe work-related injury are required to report to OSHA, but there are exceptions to the rules.
Businesses with under 10 employees at all times do not have to keep illness and injury records for OSHA even if they are in an industry with an increased risk of employee injury. The same applies to industries that are considered low-hazard. Exempt industries are found in the North American Industry Classification System (NAICS) and is the standard used by all Federal statistical agencies for business classification. If you are a small business that falls into one of these classifications and maintains an operation with 10 or fewer employees, your business is exempt from keeping records for OSHA. Does that mean you don’t have to keep safety and illness records of any kind?
From a legal aspect, no, you don’t have to keep records for OSHA. But if you’re in an industry that has higher-than-normal odds of work-related injuries, you’ll want to fill out Forms 300, 300A and 301 that outline injuries for worker’s compensation and legal purposes. Using GPS tracking as a type of safety record can help your business handle a worker’s comp claim and any litigation that arises as a result of the injury.
The Importance of Keeping Financial Records for Taxes
There’s nothing quite like the fear of an audit by the IRS to make a business owner sweat. The good news is, the chances of an audit by the IRS is low, but the bad news is, you’re going to have to produce your books for the IRS agents to examine. In the event you’ve kept excellent records of the financial activity of your business, you truly have nothing to hide or worry about from the IRS. An audit is mostly an inconvenience, but a necessary one to prove that you’re maintaining your responsibilities as an employer and tax-paying business. But if you’re not keeping good records in a timely fashion, you will get into trouble with the IRS and may be subject to penalties and fines.
Improper recordkeeping can get a business into trouble in the event the IRS performs an audit. A business that doesn’t have a solid paper trail for their financial transactions is one that can’t prove their financial decisions and actions to the IRS. Depending on how bad the issue is, the IRS may issue a slap on the wrist, or it may take legal action against the business for illegal activities such as fraud or tax evasion.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.