There are many types of accounting that require different types of accountants, and it is extremely easy for one to get lost in the sauce of it. Therefore, with the use of so many documents, to see in front of them, one must keep records.
In this article, you’ll hopefully leave more knowledgeable on the subject as it will deal with the what, the types of accounting records, and its importance.
Furthermore, you’ve come to the right place because if a company wishes to know their financial condition and health, it is essential for them to keep accounting records that are a physical representation of each transaction.
Read more to find out more.
What are accounting records?
Accounting records represent every document that makes accounting possible, from the preparations of financial statements to their finalization, which allows them to be reviewed by audits. These accounting records are assets and liabilities, monetary transactions, ledgers, journals, etc.
They are essential for
What is the type of accounting records?
There are generally two types of accounting records: single and double entry. The single entry is easier and more manageable for small businesses, whereas the double method is more complex and calls for two entries, one debit, and the other credit, for every transaction a business makes. The objective is for the books to be balanced out and for the cash flow to be surveyed.
The transaction is the beginning of any accounting record. It is the initiator of all accounting records and indicates what the business transacts, that is to say, what item has been bought or sold, depreciated, etc.
Journals record the entirety of every transaction that a company makes. There can be different journals for different sections of the business, under the condition that there they must be kept up-to-date and recorded.
It is a bookkeeping ledger in accounting that receives journal transactions to designate them by type. Simply, you move your transactions from your journal to the general ledger to know the type that they are, as the general ledger (GL) is a set of numbered accounts used by businesses to keep their finances in check, organized, categorized when the time for financial statements come.
It is the addition or total of all your credits and debits that take place during the business cycle. This step helps balance out entries. If the entries aren’t, it will be seen as an error to be corrected or potential fraud.
Of course, if you have read some of Appvizer’s accounting articles, then you would know that this is the final step in your accounting process. It regroups every single accounting document. Why are they necessary?
Well, they are made for the public and regulatory bodies such as the government, the Internal Revenue Service (IRS), the Financial Accounting Standards Board (FASB), Internal Accounting Standards Board (IASB), etc. to review whether your business is doing everything legally and is not applying any fraud in their transactions to evade taxes.
Financial statements are also important for a company that wishes to expand and seek investors. This document will provide the state of the company's finances and see whether it is worth it to invest.
Why are accounting records indispensable?
Accounting records are significant because they are key information, and evidence that is used in the preparations, verification, and audit of the financial statements. They indicate asset ownership for the purpose and creation of liabilities and provide proof for monetary and non-monetary transactions.
Impeccable records will aid in:
- Monitoring the progress of your business,
- preparing your financial statements,
- identifying sources of your income,
- keeping track of your deductible expenses like loans, salaries & wages, etc.,
- keeping a good track of the costs of staff and their performance,
- keeping track of your basis in the property,
- preparing your tax returns,
- assisting you in calculating how much tax you have to pay,
- supporting items reported on your tax returns.
Monitoring your business’ progress
If you want to monitor the progress of your company, good records will be needed. It gives you a visual representation of how your business is improving, evolving, making sales, and for which type and if not, indicates what needs to be rearranged for future sales or business.
Preparations of your financial statements
Financial statements are required under the Generally Accepted Accounting Principles (GAAP) in America, and in order to prepare them, one must keep records. They include income statements (profit or loss) that list all your business income and expense transactions, balance sheets, and statements of cash flow, which help to tackle banks, creditors, and business management.
Identification of sources of your income
As you receive money or property from different sources, the records will help identify those sources (sources of your income). It is useful in the separation of business from non-business receipts and taxable from nontaxable income.
Keeping track of your deductible expenses
They are recorded to help prevent forgotten expenses when you prepare your tax return.
Keeping track of your basis in property
The basis here is known as your investment in property for tax reasons. It aids to figure out the gain and loss incurred on the sale, exchange, or deductions for depreciation; amortization, depletion, etc.
Preparing your tax return
Obviously, no tax return can be done without records. They must be in line with your income, expenses, credits reported. The records are exactly what you generally use for the monitoring of business and the financial statement prep.
Supporting items reported on your tax return
Your business records must be available at all times for inspection by the Internal Revenue Service (IRS). If the IRS examines any of your tax returns, you may be asked to justify the items reported. A thorough set of records will speed up the examination process.
How long do you conserve accounting records?
It is advised to keep records for at least 6 years after the end of the financial year they relate to, or for an additional period of time if need be.
In the additional period, it means that the company can be concerned with:
- If the company has purchased something that may last longer than 6 years,
- the tax return was sent late,
- a transaction concerns more than one accounting period.
Hopefully, this article answered some of your doubts, questions and gives you enough confidence to take on accounting and its records to do so.