© by Fred W. Daily

One of the first things a new business needs to decide is whether to do record keeping, or hire someone to do it. For new businesses, tight cash often means no money to hire bookkeeping help. But, keep in mind that even if you hire someone, the tax law places the responsibility on your head for seeing it is done right. So, you must have a basic grasp of records in any case.

Computerized Recordkeeping

Record keeping on a computer works on the same principles as a manual system, only the computer automates the process so it's faster and more accurate

A simple-to-use software program like Quicken Home and Business eliminates the need for a handwritten set of books. I started using Quicken in my law practice ten years ago, and now it is unthinkable to ever keep my business records by hand. It works particularly well for any type of service-providing business. This program looks like only a checkbook register, but it is in reality, the backbone of the records for my business. Each transaction—an item of expense or income—is input into Quicken as either going out of, or into, my checking account. Each item is categorized as to type of expense or income using either a number or name—such as "advertising" or "201." I also enter "cash" and "credit card" payments in the same way. The best time saving feature of Quicken for me is being able to print out a set of records in a few minutes, and at any time of the year. Those easy to make, but hard to find, math errors no longer are a worry.

Manual Recordkeeping

Small time operators often begin with—but soon outgrow—a manual record-keeping system. But if you decide to start with a manual system, as many small businesses do, you'll need to understand how to do it. For a lot of folks, particularly part-timers, the pencil and paper is adequate. Manual records satisfy the tax code as long as they are accurate and can be understood or explained if questioned.

There are a few traditional ways to manually keep small business records. Inexpensive, pre-formatted record books are available at most office supply stores. Or, start with a pad of ledger sheets—columnar paper usually light green in color. You might create records something like this: going across the top of the sheet, list categories of expenses, like "advertising" "utilities" "supplies" "rent." If you don't know where something goes, put it in the last column called "miscellaneous." Title the sheet "May, 1998." As May progresses enter each transaction going down the page by date and method of payment—"cash" "check" "credit card." At the end of the month, total up all the columns and bingo, you have an expense record that should pass IRS muster. At the end of twelve months, add up all the monthly sheets and have expense figures for your tax return.

Accountants call this a "single entry" system, meaning you enter each transaction only once. As such, there is no automatic check and balance system, found in computer programs, like Quicken, or in the more formal "double entry" bookkeeping system.

One last word: no matter whether you go computer or do it by hand, you will still need to keep what accountants call "source" documents—receipts, bank statements, purchase invoices—that back up the numbers used in your record-keeping system.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

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