Business Owners: How To Keep Your Books Ready For The IRS
As a business owner, you should deposit all business receipts in a separate bank account. If possible, you should also make all disbursements by check. In regard to all business entities, with the exception of corporations, a disbursement from the business account is not necessary to qualify the expenditure as a business expense. A check written on a personal account for business purposes will qualify if that expense is otherwise allowable. It is important to document both business income and business expenses.
Write checks payable to yourself only when making withdrawals of income from your business for your own use. Avoid writing business checks payable to cash as it is important to identify which disbursements are business and which are personal. In the event of an IRS audit, this is an area that will get close scrutiny. The IRS auditor will not only look at each check to see to whom it was paid, but will also look at the reverse of the check to see by whom and how the check was endorsed. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt or a cash payment, put a statement in your records at the time of the transaction to explain the payment.
Get receipts for all business expenditures. For all business trips, make sure always to get receipts from hotels and motels. Toll receipts can also help to substantiate travel expenses. Obtain receipts from the post office when you purchase stamps and mail larger envelopes and packages. You should establish a petty cash fund for small expenses. All business expenses paid by cash should be clearly substantiated by documents showing their business purpose.
Support your entries with sales slips, invoices, canceled checks, paid bills, duplicate deposit slips, and any other documents that explain and support entries made in your books. File these materials in a safe place. Memorandums or sketchy records that approximate income, deductions, or other items affecting your tax liability will not be considered adequate by the IRS. Remember, where the IRS is concerned, the burden of proof is on the taxpayer. You will not be given the benefit of the doubt.
Classify your accounts by separating them into five groups:
1. Income
2. Expenses
3. Assets
4. Liabilities
5. Equity (net worth).
For your assets, record the date of acquisition, cost or other basis, depreciation, depletion, and anything else affecting their basis. Basis is the amount of your investment in a property for tax purposes.
Keeping Records: You must keep the books and records of your business available at all times for inspection by the IRS. Records must be kept as long as they may be needed in the administration of any Internal Revenue law. Keep records supporting items reported on a tax return until the period of limitations for that tax year has expired. Usually, this is the later of:
1. Three years after the date your return is due or filed; or
2. Two years after the date the tax was paid.
However, you should keep some records indefinitely. For example, if you adopt the last-in first-out (LIFO) method of valuing your inventory or change your accounting method, records supporting these decisions and approvals from the IRS may be needed for an indefinite time.
You should also keep records that support your basis in property for as long as they are needed to figure the correct basis of your original or replacement property (including capital improvements). Keep copies of your tax returns. They will help you in preparing future tax returns and in making computations if you later file an amended return or a claim for a refund.
Using Microfilm For Recordkeeping: Microfilm and microfiche reproductions of general books of accounts (such as cash books, journals, voucher registers, and ledgers) are accepted by the IRS for recordkeeping purposes if they comply. If your micrographic system does not meet the requirements of Revenue Procedure 81-46, you may be subject to penalties.
Using Computerized Recordkeeping: If you maintain your records with an automated data processing system, you must be able to produce legible records from the system to provide the information needed to determine your correct tax liability. You must keep a complete description of the computerized portion of your accounting system. This documentation must be sufficiently detailed to show the applications being performed; the procedures used in each application; or the controls used to ensure accurate and reliable processing; and controls used to prevent the unauthorized addition, alteration, or deletion of retained records. These records must be retained for as long as they may be material in the administration of any Internal Revenue law.
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Thursday, September 17, 2009
A Crash Course On Understanding Financial Statements
A Crash Course On Understanding Financial Statements
Businesses operate to achieve various goals. To meet these goals a business must achieve two primary objectives: To earn a satisfactory profit and to remain solvent (be able to pay its debts). If a business fails to meet either of these primary objectives, it will not be able to survive in the long run.
Financial statements are accounting reports used to summarize and communicate financial information about a business. Three major financial statements - the income statement, the statement of changes in financial position, and the balance sheet - are used to report information about the business's primary objectives. These financial statements are the end result of the accounting process. Each of them summarizes certain information that has been identified, measured, recorded, and retained during the accounting process.
Income Statement: An income statement is a financial statement summarizing the results of a business's earnings activities for a specific period of time. It shows the revenues, expenses, and net income (or net loss) of the business for this period. Revenues are the prices charged to the business's customers for goods and services provided. Expenses are the costs of providing the goods or services. The net income is the excess of revenues over expenses; a net loss arises when expenses are greater than revenues.
Statement of Changes in Financial Position: A statement of changes in financial position is a financial statement summarizing the results of a business's financing and investing activities for a specific time period. The results of the business's financing activities are shown in a "Sources" section of the statement; this section includes sources from operations and other sources.
Balance Sheet: A balance sheet summarizes a business's financial position on a given date. It is alternatively called a statement of financial position. A balance sheet lists the business's assets, liabilities, and owner's equity.
Assets: Assets are the economic resources of a business that are expected to provide future benefits to the business. A business may own many assets, some of which are physical in nature, such as land, buildings, supplies to be used in the business, and goods (inventory) that the business expects to sell to its customers. Other assets do not possess physical characteristics, but are economic resources because of the legal rights they convey to the business. These assets include amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance), and investments made in other businesses.
Liabilities: Liabilities are the economic obligations (debts) of a business. The external parties to whom the economic obligations are owed are referred to as the creditors of the business. Usually, although not exclusively, legal documents serve as evidence of liabilities. These documents establish a claim (equity) by the creditors (the creditors' equity) against the assets of the business. Liabilities include such items as amounts owed to suppliers (accounts payable), amounts owed to employees for wages (wages payable), taxes payable, and mortgages owed on the business's property. A business 'may also borrow money from a bank on a short or long-term basis by signing a legal document called a note, which specifies the terms of the loan. Amounts of such loans would be listed as notes payable.
Owner's Equity: The owner's equity of a business is the owner's current investment in the assets of the business. For a partnership, the owner's equity might be referred to as the partners' equity; for a corporation, stockholders' equity. The owner's equity is affected by the capital invested in the business by the owner, by the business's earnings from its operations, and by withdrawals of capital by the owner of the business.
This free article is provided by the FreeArticles.com Free Articles Directory for educational purposes ONLY! It cannot be reprinted or redistributed under any circumstances.
Article Copyright By Author. All Rights Reserved Worldwide.
Businesses operate to achieve various goals. To meet these goals a business must achieve two primary objectives: To earn a satisfactory profit and to remain solvent (be able to pay its debts). If a business fails to meet either of these primary objectives, it will not be able to survive in the long run.
Financial statements are accounting reports used to summarize and communicate financial information about a business. Three major financial statements - the income statement, the statement of changes in financial position, and the balance sheet - are used to report information about the business's primary objectives. These financial statements are the end result of the accounting process. Each of them summarizes certain information that has been identified, measured, recorded, and retained during the accounting process.
Income Statement: An income statement is a financial statement summarizing the results of a business's earnings activities for a specific period of time. It shows the revenues, expenses, and net income (or net loss) of the business for this period. Revenues are the prices charged to the business's customers for goods and services provided. Expenses are the costs of providing the goods or services. The net income is the excess of revenues over expenses; a net loss arises when expenses are greater than revenues.
Statement of Changes in Financial Position: A statement of changes in financial position is a financial statement summarizing the results of a business's financing and investing activities for a specific time period. The results of the business's financing activities are shown in a "Sources" section of the statement; this section includes sources from operations and other sources.
Balance Sheet: A balance sheet summarizes a business's financial position on a given date. It is alternatively called a statement of financial position. A balance sheet lists the business's assets, liabilities, and owner's equity.
Assets: Assets are the economic resources of a business that are expected to provide future benefits to the business. A business may own many assets, some of which are physical in nature, such as land, buildings, supplies to be used in the business, and goods (inventory) that the business expects to sell to its customers. Other assets do not possess physical characteristics, but are economic resources because of the legal rights they convey to the business. These assets include amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance), and investments made in other businesses.
Liabilities: Liabilities are the economic obligations (debts) of a business. The external parties to whom the economic obligations are owed are referred to as the creditors of the business. Usually, although not exclusively, legal documents serve as evidence of liabilities. These documents establish a claim (equity) by the creditors (the creditors' equity) against the assets of the business. Liabilities include such items as amounts owed to suppliers (accounts payable), amounts owed to employees for wages (wages payable), taxes payable, and mortgages owed on the business's property. A business 'may also borrow money from a bank on a short or long-term basis by signing a legal document called a note, which specifies the terms of the loan. Amounts of such loans would be listed as notes payable.
Owner's Equity: The owner's equity of a business is the owner's current investment in the assets of the business. For a partnership, the owner's equity might be referred to as the partners' equity; for a corporation, stockholders' equity. The owner's equity is affected by the capital invested in the business by the owner, by the business's earnings from its operations, and by withdrawals of capital by the owner of the business.
This free article is provided by the FreeArticles.com Free Articles Directory for educational purposes ONLY! It cannot be reprinted or redistributed under any circumstances.
Article Copyright By Author. All Rights Reserved Worldwide.
A Crash Course On Understanding Financial Statements
A Crash Course On Understanding Financial Statements
Businesses operate to achieve various goals. To meet these goals a business must achieve two primary objectives: To earn a satisfactory profit and to remain solvent (be able to pay its debts). If a business fails to meet either of these primary objectives, it will not be able to survive in the long run.
Financial statements are accounting reports used to summarize and communicate financial information about a business. Three major financial statements - the income statement, the statement of changes in financial position, and the balance sheet - are used to report information about the business's primary objectives. These financial statements are the end result of the accounting process. Each of them summarizes certain information that has been identified, measured, recorded, and retained during the accounting process.
Income Statement: An income statement is a financial statement summarizing the results of a business's earnings activities for a specific period of time. It shows the revenues, expenses, and net income (or net loss) of the business for this period. Revenues are the prices charged to the business's customers for goods and services provided. Expenses are the costs of providing the goods or services. The net income is the excess of revenues over expenses; a net loss arises when expenses are greater than revenues.
Statement of Changes in Financial Position: A statement of changes in financial position is a financial statement summarizing the results of a business's financing and investing activities for a specific time period. The results of the business's financing activities are shown in a "Sources" section of the statement; this section includes sources from operations and other sources.
Balance Sheet: A balance sheet summarizes a business's financial position on a given date. It is alternatively called a statement of financial position. A balance sheet lists the business's assets, liabilities, and owner's equity.
Assets: Assets are the economic resources of a business that are expected to provide future benefits to the business. A business may own many assets, some of which are physical in nature, such as land, buildings, supplies to be used in the business, and goods (inventory) that the business expects to sell to its customers. Other assets do not possess physical characteristics, but are economic resources because of the legal rights they convey to the business. These assets include amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance), and investments made in other businesses.
Liabilities: Liabilities are the economic obligations (debts) of a business. The external parties to whom the economic obligations are owed are referred to as the creditors of the business. Usually, although not exclusively, legal documents serve as evidence of liabilities. These documents establish a claim (equity) by the creditors (the creditors' equity) against the assets of the business. Liabilities include such items as amounts owed to suppliers (accounts payable), amounts owed to employees for wages (wages payable), taxes payable, and mortgages owed on the business's property. A business 'may also borrow money from a bank on a short or long-term basis by signing a legal document called a note, which specifies the terms of the loan. Amounts of such loans would be listed as notes payable.
Owner's Equity: The owner's equity of a business is the owner's current investment in the assets of the business. For a partnership, the owner's equity might be referred to as the partners' equity; for a corporation, stockholders' equity. The owner's equity is affected by the capital invested in the business by the owner, by the business's earnings from its operations, and by withdrawals of capital by the owner of the business.
This free article is provided by the FreeArticles.com Free Articles Directory for educational purposes ONLY! It cannot be reprinted or redistributed under any circumstances.
Article Copyright By Author. All Rights Reserved Worldwide.
Businesses operate to achieve various goals. To meet these goals a business must achieve two primary objectives: To earn a satisfactory profit and to remain solvent (be able to pay its debts). If a business fails to meet either of these primary objectives, it will not be able to survive in the long run.
Financial statements are accounting reports used to summarize and communicate financial information about a business. Three major financial statements - the income statement, the statement of changes in financial position, and the balance sheet - are used to report information about the business's primary objectives. These financial statements are the end result of the accounting process. Each of them summarizes certain information that has been identified, measured, recorded, and retained during the accounting process.
Income Statement: An income statement is a financial statement summarizing the results of a business's earnings activities for a specific period of time. It shows the revenues, expenses, and net income (or net loss) of the business for this period. Revenues are the prices charged to the business's customers for goods and services provided. Expenses are the costs of providing the goods or services. The net income is the excess of revenues over expenses; a net loss arises when expenses are greater than revenues.
Statement of Changes in Financial Position: A statement of changes in financial position is a financial statement summarizing the results of a business's financing and investing activities for a specific time period. The results of the business's financing activities are shown in a "Sources" section of the statement; this section includes sources from operations and other sources.
Balance Sheet: A balance sheet summarizes a business's financial position on a given date. It is alternatively called a statement of financial position. A balance sheet lists the business's assets, liabilities, and owner's equity.
Assets: Assets are the economic resources of a business that are expected to provide future benefits to the business. A business may own many assets, some of which are physical in nature, such as land, buildings, supplies to be used in the business, and goods (inventory) that the business expects to sell to its customers. Other assets do not possess physical characteristics, but are economic resources because of the legal rights they convey to the business. These assets include amounts owed by customers to the business (accounts receivable), the right to insurance protection (prepaid insurance), and investments made in other businesses.
Liabilities: Liabilities are the economic obligations (debts) of a business. The external parties to whom the economic obligations are owed are referred to as the creditors of the business. Usually, although not exclusively, legal documents serve as evidence of liabilities. These documents establish a claim (equity) by the creditors (the creditors' equity) against the assets of the business. Liabilities include such items as amounts owed to suppliers (accounts payable), amounts owed to employees for wages (wages payable), taxes payable, and mortgages owed on the business's property. A business 'may also borrow money from a bank on a short or long-term basis by signing a legal document called a note, which specifies the terms of the loan. Amounts of such loans would be listed as notes payable.
Owner's Equity: The owner's equity of a business is the owner's current investment in the assets of the business. For a partnership, the owner's equity might be referred to as the partners' equity; for a corporation, stockholders' equity. The owner's equity is affected by the capital invested in the business by the owner, by the business's earnings from its operations, and by withdrawals of capital by the owner of the business.
This free article is provided by the FreeArticles.com Free Articles Directory for educational purposes ONLY! It cannot be reprinted or redistributed under any circumstances.
Article Copyright By Author. All Rights Reserved Worldwide.
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