Best Practices for Organizing Business Receipts?

The task of organizing receipts or documents for income and expenses is at the back of the mind for most business owners. Accurate record keeping of these documents per IRS guidelines is essential as it will be helpful to defend your income and expenses during an audit. What are the best practices for organizing business receipts?

What business income and expense records do I need to keep and for how long?

Your documents for income should show the amounts and sources of income. Such documents may include invoices, check images, cash and credit deposits, bank statements, P&L detail and balance sheet.

The IRS allows business owners to deduct several expenses. Since expenses must be costs you incur to carry on your business, you need to show proof that the expenses were business related. Keeping your documents for expenses properly organized will help convince the tax authority about the legitimacy of the expenses.

The documents for expenses should include the payee, payment amount, proof of payment and date. In addition, you need a description of the item purchased or service received which shows the amount was for a business expense. Documents for expenses include vendor bills, canceled checks, bank and credit card statements, store receipts and credit card receipts. You also include a description of the expense to show it is a valid business expense.

In general, you should keep business records for three years. In some cases, you may need to keep records for much longer. For example, if you failed to report more than 25% of income shown on your return, you need to keep records for 6 years. And if you did not file a tax return or filed a fraudulent return, you need to keep records indefinitely.

So, how do you accurately maintain these records and receipts? The tips mentioned in this blog post are important for businesses and individuals alike.

1. Categorize and Organize Receipts Every Month

A recommended practice is to review and categorize the receipts each month. This will help you keep the receipts properly organized and save a lot of time in keeping track of them at the end of the year during the audit period.

To keep the receipts organized, you should buy an accordion folder in which you can place the receipts by year and category. The folder will help you in locating a receipt when required.

2. Add Notes on Receipts

Another best practice is to add important information about the expense on the receipts. This will help you remember details of the receipts during the audit. For example, if you entertained customers, it will be a good idea to write down the full names of the specific customers you entertained and why it was a valid business expense.

3. Digitize the Receipts

A good practice for managing receipts is to digitize them. Digital receipts will save a lot of time in auditing the records. Once you digitize, you can save and protect the receipts in free online storage accounts such as Google Drive, Microsoft One Drive or Dropbox. Then, you can easily organize digital receipts in different folders based on specific categories if required. Or you can organize the receipts for different types of business expenses such as supply chain, operational expenses, petty cash expenses and others.

You can even create subfolders where you organize receipts for each category based on the date. This will make it easier for you to find the required receipts as required.

4. Integrate with Accounting Software

Accounting apps such as QuickBooks and Sage allow you to add a digital version of the receipts. Integrating receipts with accounting apps will allow you to keep proof of each expense. Again, this will prove invaluable during the audit of your accounting records.

5. Be careful with deleting Receipts

A lot of businesses record all receipts received after purchase. This is not an efficient practice as going through all the receipts will take a lot of time. However, this will minimize headaches for you down the road. Further, insurance and other agencies may require access to much older records than the IRS.

It may not be a bad idea to separate out receipts that have expired or are not required for auditing, tax and other purposes. This action will result in a slim folder for receipts that will make it easier for the auditor to analyze.

Conclusion

Following best practices to organize business receipts helps you defend your income and expense claims. In addition, make sure you hire experienced outsourced bookkeeping providers for recording financial transactions. Outsourcing bookkeeping tasks will help you focus on important aspects of your business.

Maxim Liberty will help you in accurate bookkeeping and keeping accounts in compliance with local accounting-related regulations. You can contact us today by dialing (703) 957-6938.