A good record-keeping system is crucial to business success.
Judy Hartcher takes us through how to get your records into good shape and keep the tax man happy.
Record-keeping may seem a chore, especially for new business owners. But research has shown it helps SMEs avoid a tax audit, potentially saving them thousands of dollars in hefty fines by the ATO. And good records are important for the planning and development of your business.
In fact, recent research commissioned by CPA Australia on record-keeping and its effect on tax compliance shows a direct link between poor record-keeping and the likelihood of an adversely amended assessment where a small business has been subjected to a tax audit.
However, good record-keeping is not just about keeping the tax man away. The main reason for keeping records is to provide information to owners or managers about how the business is performing.
Apart from meeting taxation requirements, properly kept records will show the current financial position of the business, including information on cash flow, revenue, debtors and creditors, inventory, and will assist business owners in their decision-making on employment, expansion, and loan applications. And being on top of the paperwork will help verify business results to auditors and potential purchasers.
So, what kind of records should a small business keep? The following basic bookkeeping records are important:
• payments book to record all payments made by the business;
• receipts book to record all monies paid to the business;
• petty cash book to record small amounts of cash needed to purchase tea, stamps etc.;
• cheque book to make payments from the business bank account;
• deposit book to record all deposits into the business account;
• payments file of all invoices, statements and other evidence supporting payments out of the bank account—this information should be filed in cheque number order;
• invoice book to record goods sold on credit, with details of goods sold, including GST if applicable—the duplicate invoice should be crossed through when payment is received and noted with the date of banking of the receipt;
• receipt forms to record cash payment for goods sold (when large numbers of cash sales are made, a cash register should be used);
• monthly bank statements showing all transactions that have gone through the account;
• bank reconciliation, which should be prepared at least once a month—this reconciles the balance per the books of the business with the balance per the bank statement.
Other records which are recommended, depending on the type of business, are general ledgers, journals, purchase orders, stock records, assets register, wages records and a permanent file of all documents important to the business such as loan documents, lease agreements, and contracts.
Record-Keeping Requirements
The ATO website (www.ato.gov.au) provides a simple guide to businesses’ minimum record-keeping requirements, including sales and purchasing records, year-end income tax records and records of payments to employees. There are penalties for failing to keep good records so it is important to be familiar with the appropriate statutory requirements.
How long should SMEs keep their records? Under taxation laws, all records relating to income tax must be kept for five years after the records were prepared or obtained. This includes GST records which generally have to be retained for five years after the relevant GST event occurs. Fringe benefit tax records must be kept for seven years from the date of the relevant transaction. And capital gains tax records must be kept until the death of the taxpayer, or five years after the date of the asset sale.
New businesses may be able to keep their records in handwritten form. Most of the books and other records mentioned above can be purchased from a stationer. Payments and receipts should be kept in separate multi-column books (at least 13 columns) or in the front and back of the same book if transactions are relatively few.
However, as the business grows, business owners should really consider computerising accounting records. This may be done on a spreadsheet or in a specialised program. According to CPA Australia’s research on record-keeping, the majority of public practice accountants believe computerised record-keeping improved accuracy for more than half of their SME clients. SMEs also saw the value of such systems, having made savings as a result of their introduction and maintenance.
There are a number of software packages on the market, and the choice should be made with care as not all packages may be suitable for your particular purpose. If you are not sure, before making a commitment seek the advice of your accountant on what you need for your business. Records can be retained electronically, such as being stored on a computer, so long as they are readily accessible and meet certain other requirements relating to legibility. Some systems can help you to transfer information easily to your accountant and other stakeholders such as banks, saving you considerable time and money.
Apart from financial records, businesses should also record information that will help them profit and grow. It’s important to know your customers and understand which products or services return the best profit. Without such records, you are unable to analyse your sales data, leaving much of your strategy to guesswork.
Risk Management
Record-keeping is also important for risk management. It helps implement internal controls, which assists in asset protection and in preventing theft and fraud. Examples of internal control records include reconciliation of bank accounts, sales, purchasing and payroll figures. You should maintain a register with all details of your business assets in case of theft or loss. This will assist in valuing items for insurance purposes.
Inadequate record-keeping is often thrown into the spotlight when a dispute occurs. Many SMEs that have disputes over lease conditions have not kept records of conversations and meetings with their landlords, and have had little to support their case when the dispute has escalated. In legal transactions and agreements, it is foolish to rely on verbal agreements. Always try to have any agreement in writing, signed by both parties. If that is not possible, keep your own record. This also applies to arrangements with staff, especially those related to performance management.
Keeping good records is essential to a successful business. However, the record-keeping system must suit the business and capture the information the owner needs to run a profitable business. A system that is too complex can be just as detrimental as an inadequate system. If you are unable to find out how your business is performing in a timely manner, you could risk losing your business, so give record-keeping the attention it deserves.
* Judy Hartcher is business policy adviser for CPA Australia.
Disclaimer: This is general advice only and does not take into account your business objectives, financial situation or needs.
Record-Keeping Resources:
• ATO website at www.ato.gov.au (click on ‘businesses’ then ‘record-keeping essentials’).
• Internal controls guide: purchase from the CPA Australia website at www.cpaaustralia.com.au (click on ‘member services’, ‘publications’ then ‘practical guides and tools&
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The main reason for keeping records is to provide information to owners or managers about how the business is performing
Storage Solutions
While the ‘paperless office’ is somewhat of a myth, the electronic age has at least helped simplify business record-keeping and document storage processes. Nevertheless, compliance obligations and good record-keeping practices will still require a level of physical as well as digital storage for all your business documentation.
We’ve compiled a list of options to help you get started. Remember, it’s worth shopping around to find the best solution to suit your storage requirements.
PHYSICAL STORAGE
• Kennards Self Storage www.kss.com.au
• National Storage www.nationalstorage.com.au
• Containaway Mobile Self Storage www.containaway.com.au
• Storage King www.storageking.com.au
• Storage Choice (QLD) www.storagechoice.com.au
• Rent a Space (NSW) www.rentaspace.com.au
• Fry’s Self Storage (VIC) www.frys.com.au
• U-Store-It (SA and NT) www.ustoreit.com.au
• Self Lock Storage (WA) www.selflockstorage.com.au
DIGITAL STORAGE
Remote/Online:
• e-Record (ATO’s free electronic record-keeping product) www.ato.gov.au
• eStorage (by Storage King and dbGlobal) www.storageking.com.au/data.html
• Web Cabinet (Web Office’s online electronic document and records management system) www.villagemall.com.au
Software:
• TRIM Context (records management of both paper-based and electronic records) www.towersoft.com/ap/
• DataWorks (document and records management) www.avand.com.au
• EMC Documentum (for enterprise document management) www.documentum-sea.com
Most of these companies have multiple storage facilities around Australia. It’s also worth checking out the Yellow Pages or searching the Self-Storage Association of Australasia website (www.selfstorage.com.au) for your local independent storage provider.
