Legalities: Licenses, taxes, regulations and bookkeeping



Legalities: Licenses, taxes, regulations and bookkeeping

Welcome to the small business red-tape district.

The following pages will give a basic description of the red-tape subjects that produce headaches among most small business owners -- licenses, permits, employee regulations, taxes and bookkeeping.

These are areas that the average small business owner loathes because they have nothing to do with that original entrepreneurial dream. Not one item that we mention here will help you make a better mousetrap -- but ignore the red tape now and it could strangle your business later.

Legalities: The records to keep

Your transactions and book entries need to be backed up by sales slips, invoices, receipts and canceled checks. If the IRS audits your business, you may have to show evidence of claims on your business tax return. Supporting documents should be organized and easy to find. For example, you may want to store them by year and catalog them as income or expenses.

General documents

Here are some of the documents the IRS expects you to have on file:

• Gross receipts -- Show the amount and sources of income with register tapes, bank deposit slips, invoices, receipt books, credit card slips

• Purchases -- To document items you buy and resell, including parts and raw materials, keep canceled checks, cash register tape receipts, credit card sales slips, invoices

• Expenses -- Track the cost of running the business through canceled checks, cash register tapes, account statements, credit card sales slips, invoices, petty cash slips for small cash payments.

• Assets -- Maintain records on property you buy, sell or improve that is used by the business by keeping purchase and sales invoices, canceled checks, real estate closing statements.

How long to keep records

Most records should be kept at least until the IRS period of limitations has run out. For tax purposes, the IRS requires that all employee records should be held for at least four years. You may need to keep records longer for non-tax purposes, such as insurance or financing, so check with the appropriate institution. Legalities: How to keep the records

Bookkeeping basics

There is no special record-keeping system required or approved by the IRS. At a minimum, though, your records must clearly show your business income and summarize transactions through original and supporting documents.

To keep track of business transactions, you need to write them down, usually in specialized books called journals or ledgers. You can buy simplified paper versions in office supply stores or download them from the SBA Shareware Library. There are also several computer software programs that are easy to use.

Record-keeping is all about numbers. Once you've compiled the numbers required for tax purposes, they have to be submitted, along with the payments, to the IRS.

Hire a professional accountant

Hiring an accountant can take a lot of pressure off the small business owner who is concentrating on sales, marketing and operations. A good accountant can help set up a basic record-keeping system that works for your line of business.

While business owners can often handle the day-to-day bookkeeping themselves or with a bookkeeper, most are advised to let an accountant handle complicated tasks such as preparing tax returns and financial statements.

There are many ways to arrange professional accounting services. The Online Women's Business Center in partnership with the SBA has created a database of accounting firms, associations and nonprofit business accounting centers for more information. The American Association of Certified Public Accountants also has an online brochure aimed at business owners, advising them how to choose an accountant.

Once your bookkeeping/accounting team is in place, whether it's in-house or comprised of outside help, you need to make some important decisions on how you'll keep the records.

Pick a tax year

There are two types of annual accounting periods on which you can base the way you keep records and report income and expenses. You can choose either the calendar year or the fiscal year.

• The calendar tax year is a period of 12 consecutive months beginning Jan. 1 and ending Dec. 31.

• The fiscal tax year is a period of 12 consecutive months ending on the last day of any month other than December. Basically, it's a 52- or 53-week period ending on a specific day of the week that falls either in the last week of a specific month or nearest the last day of a month.

Select an accounting method

You must choose an accounting method to determine how you will report income and expenses in your books and on your tax returns. There are two basic types of accounting systems to choose from: accrual and cash basis. Check with your accountant, as there are instances when a company is required to use the accrual method.

• Cash basis -- Most small businesses use cash basis, or "real-time" accounting, whereby transactions are recorded when they happen. For example, when you are paid for a service, you record it as cash in, even if the service was performed a month ago.

• In accrual accounting, you record the income when it's earned, not received. It's the same with expenses: You record the utility bill when you get it, not when you pay it. Many businesses with inventories use the accrual method.

Cash, accrual or a combination of both methods are all acceptable by the IRS as long as records are clear and accurate and you use the same accounting method every year.

You must ask the IRS for approval if you want to change.

|Sample monthly summary of cash receipts |

| |

|Day |

|Net sales |

|Sales tax |

|Daily receipts |

|Deposits |

| |

|1 |

|10.00 |

|0.50 |

|10.50 |

|  |

| |

|2 |

|20.00 |

|1.00 |

|21.00 |

|31.50 |

| |

|3 |

|30.00 |

|1.50 |

|31.50 |

|31.50 |

| |

|Totals |

|60.00 |

|3.00 |

|63.00 |

|63.00 |

| |

Choose a bookkeeping system.

• Single-entry system -- The simplest bookkeeping system to maintain is the single entry system, which records the movement of income and expenses through a daily summary of cash receipts, and a monthly summary of cash receipts and disbursements.

• Double-entry system -- The field of accounting is based on the double-entry system, which records transactions into journals and ledgers. With this system, daily transactions, including sales, purchases, cash receipts, accounts receivable and accounts payable, are recorded in journals. Each account has a side for debits and a side for credits. You enter every transaction as a debit in one account and a credit in another. It's more time-consuming, but can be more accurate as it tends to be self-balancing.

The journal information is later summed up and transferred to a general ledger. From the ledger, you or your accountant can formulate the most important business financial statements, the balance sheet and income statement.

TIP: Many businesses have a business checking account, separate from personal checking, using the checkbook as the main record of daily expense transactions. By depositing all receipts into the checking account and writing checks for all business expenses, you can keep good daily transaction records. These records can be transferred to your books.

Preparing a financial statement

At the end of your accounting year, you will have to balance the books for tax purposes and to check on the financial health of the company. The financial statement that shows this information is called the balance sheet, and it's similar to the personal net worth statement.

Most of the numbers needed to enter into this spreadsheet can be compiled from the general ledger after all the journal entries have been posted.

A sample double-entry business balance sheet would look like this:

|Current assets |

|Current liabilities |

| |

|Cash |

|$1,000 |

|Accounts payable |

|$3,000 |

| |

|Accounts receivable |

|$2,000 |

|Wages |

|$2,000 |

| |

|Inventory |

|$3,000 |

|Short-term notes |

|$1,000 |

| |

|Subtotal |

|$6,000 |

|Subtotal |

|$6,000 |

| |

|Fixed assets |

|Long-term liabilities |

| |

|Building (less depreciation) |

|$10,000 |

|Long-term loan 1 |

|$3,000 |

| |

|Equipment (less depreciation) |

|$2,000 |

|Long-term loan 2 |

|$3,000 |

| |

|Subtotal |

|$12,000 |

|Subtotal |

|$6,000 |

| |

|  |

|  |

|Owner's equity (investment) |

|$6,000 |

| |

|  |

|  |

|  |

|  |

| |

|Total assets |

|$18,000 |

|Total liabilities and equity |

|$18,000 |

| |

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