WHAT YOU NEED TO KNOW ABOUT RECORD KEEPING

 

The tax laws require you to keep records to back up the figures you supply to Inland Revenue for example, the figures in your financial statements, your tax returns and other schedules and documents. This article explains the purpose of record keeping, the records you need to keep, and how long you must keep them.

 

Why keep records?
There are good business reasons for keeping proper records - apart from your obligations under the tax laws.

More accurate figures
Basing your calculations on records is more reliable than using your memory or estimates.

Better control of your business
With good records, it is possible to "keep your finger on the pulse" of your business. Good record keeping will help you:
draw up effective budgets
price your work properly
keep track of money owing to you
cope with uncertainty and avoid "nasty surprises"
ensure your business is making a profit
generally, make more effective decisions.

More chance of getting a loan
If you keep good records, you'll often be able to present a more compelling case to a lender, and improve your ability to raise finance.

You'll save time and money
If you make an effort to keep your records up-to-date, it will be a lot quicker and easier to complete your tax returns. And if you have an accountant, they won't need to spend time putting your records in order. This can save accounting fees.

Audits will be less hassle
If you are in business, you can expect to be audited by Inland Revenue at some stage. During an audit, an Inland Revenue investigator will examine your tax return figures and verify them by checking back to your business records. If records are missing or inadequate, you may be faced with an additional tax bill. For example, the investigator may disallow an expense if there are no records to prove it took place. There are also penalties if proper records are not kept.

Good records are an advantage if you sell your business
Keeping proper records is good evidence that you've been running your business professionally. And you will be able to back up your claims about the status and performance of the business.

Don't be tempted to "take money from the till" or do cash jobs that you don't put through the books. Understating your turnover may reduce your tax (illegally), but it will also make it harder for you to sell your business. And if a buyer realises what you've done, they may question your honesty in other areas.

 

Records you need to keep
"Business records" consist mainly of source documents and books of account.

Source documents
A source document provides evidence that a transaction has occurred. Examples of those you must keep are:

Income transactions Expense transactions Other transactions
Sales invoices, including tax invoices Expense invoices, including tax invoices Hire purchase agreements
Debit and credit notes Debit and credit notes Loan agreements
Receipts issued Receipts received Contracts
Bank statements Bank statements Sale and purchase agreements
Deposit slips Cheque butts Tax code declarations from your employees
Till tapes Credit card vouchers  

Carefully file source documents in a logical order so you can easily retrieve them when necessary.

Please refer to the Inland Revenue guide Smart business (IR 320) for more information.

Books of account
There are many types of books of account (paper-based and computerised), but they all take the information from the source documents, collate it, and produce the figures which go in your financial statements and tax returns.

Small businesses often have the following books of account:
cashbook
petty cashbook
wagebook
journal/working papers.

Other records
You may also have to use and retain:
a motor vehicle logbook
stocktake records.

Computerised records
If you keep your records on computer, you still have to keep cheque butts, invoices, tax invoices (if registered for GST), bank statements and any other documentation to prove your income, purchases and expenses.

 

How long must you keep your records?
Keep all your business records for at least seven years from the end of the tax year or the taxable period to which they relate. Even after you stop operating your business, you still have record-keeping responsibilities.

 

Personal records
It's a good idea to keep all personal records and transactions separate from business records. This is best achieved by using separate cheque and savings accounts for the business. As with business records, you must keep all private records (including private bank account records) for seven years.

 

 

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