Keeping Business Records - Long After the Business
The Big Question!
Keeping business records are extremely important. It could mean the difference between failure (jail or bankruptcy) and success. But what to keep and for how long can be very perplexing. The IRS states that all records should be kept for a period of time needed to prove income or deductions. Seems pretty clear, right? About as clear as mud, that is. The best thing to do is to consult a CPA who should have the experience to help you. Laws change over time and a CPA should be abreast of all new laws: federal and local.
But sometimes we just need an idea because CPA’s don’t come cheap. If you’ve worked in the finance area long enough, you discover that each company needs to have policies set in place that is mainly based on management discretion if the law is not clear on time periods. Rely on wisdom and experience because keeping records too long could cost you as well as disposing of them too early.
Instead of giving you just a list of records and the period like you can get at many other sites, let’s discuss as we go along exactly why each type of record of handled the way it is.
Assets (Capital) – These are the large purchases (computers, furniture, buildings) that the IRS allows you to spread the expense over several years so that your surplus doesn’t become a deficit that much faster and is also a tax benefit. Each asset has a different length of service (life). Computers usually have a life of around three to five years. Furniture might be depreciated (expense recognized – value decreased) over twenty years. It varies from company to company but the trends need to be the same. The general rule of thumb is to keep the records at least three years past the life of the asset (when it’s value is zero on the books). Every company I’ve worked for, plays it safe and keeps them forever because they didn’t have enormous quantities of them. If that is your case, keep them indefinitely. If you have a ton of assets, consult your accountant for advice.
Accounts Payable Records – When you receive and pay an invoice/bill, you create accounts payable records. The actual copies of the invoices/bills should be kept for about three years. If you have them as electronic images, the length of time shouldn’t matter too much since storage of virtual information is unlimited compared to the amount of space boxes of invoices can take up. It is not uncommon for businesses to have ten or twenty boxes of accounts payable information for an entire year. When it comes the accounts payable ledger (the listing of the transactions), do not dispose of them. They are to be kept permanently. That is because in an audit, the ledger is considered more useful and concise than having tons of individual copies of invoices.
Accounts Receivable Records – When a customer orders your product or service, you create accounts receivable records. These are reported on your financials as expected money/assets coming in. These are very important since overstatement is fraudulent and misrepresenting of the financial stability of your company. The general rule for the accounts receivables records and the ledger is about five years. In reality, an audit is mainly focused on what makes up the current accounts receivables. Therefore, if it is cleared and paid in full, it is not focused on from a receivables stand point. Keep the records the five years after the account is cleared in case of questions.
Balance Sheets – These show where you stand as a whole today financially. When asked how much you are worth, hand them the balance sheets. Along with the income statements, you have here the most important financial documents that you could have. Therefore, they should never be destroyed. Make sure that a balance sheet is saved for every year you are in business. It might be wise to keep two copies in two separate locations in case of fire or natural disasters.
Bank Deposits – Auditors look at bank deposits to verify the accuracy of your cash and to see if there is any fraud. Over time the importance of these documents fade as that cash is probably long gone. Keep these records for about three years. The good news is that most banks now keep electronic copies of these transactions also so that in case you need them from further back in time or disaster strikes you might be able to find them.
Bank Statements – These are also important when verify accuracy. As with the bank deposits, these are so easy to get in the virtual world that if you happen to not keep them the full recommended three years don’t panic. They are easily obtained. But don’t let that be the reason to destroy them before the three years is up.
Cash Receipts – Many small businesses are run on the cash basis (money is exchanged at point of purchase). Compared to the accrual method (accounts receivable transactions) cash basis is more likely to have theft or fraud. Therefore, audits are more likely to occur. Keep these records for at least seven years. Don’t play Russian roulette with the IRS.
Check Register – This is a concise record of all money going in and out of the checking account. Because of that, they are loved by auditors. Keep them permanently.
Payroll Checks – Keep all payroll check information for at least two years. Personally, I would suggest keeping them at least seven years because of law suits and audits. Check with your state government for any special time frames that they impose.
Cost Accounting Records – These are the records backing up your inventory costs. Auditors get down and dirty in these and the general rule of them is usually to keep them permanently. Some places will suggest five years, but at the minimum keep the end of year reports for each year permanently.
Expense Reports and Receipts – Keep these records for at least three years. Normally, auditors will not go much further past that. But if you want to feel more secure, keep them about seven years.
Certified (Audited) Financial Statements – Each year it is wise to have your financials reviewed by a CPA and certified. This means that the financials have been reviewed and approval or unapproval is given of them. This can be usual for obtaining loans or getting investors. Never destroy these records. They are vital.
Periodic Financial Statements – These are your monthly and quarterly financial statements. These are very important for your business at that moment but once audited they importance diminishes. Keep them no less than two years.
General Ledger – The summary of all your transactions is another very important document. If it is important to an auditor, never destroy it. This is one of them. Keep them!
Profit & Loss (Income Statement) – Another important document to keep. Never destroy them. This actually shows your profit or loss for each period.
Tax Returns – These are more records to never destroy. In case you are audited by the IRS, you will need these.
Employee Records – Keep all employee records at least seven years after the employee has been terminated. That ensures that nothing is destroyed before chances of lawsuits occur.
Better Safe Than Sorry
These are just a few of the various records that companies produce and need to keep. Check with the IRS or your accountant for further information. It is always safe to keep the records if you are unsure. If space is a problem, use the virtual world and save them electronically. Make use of the technology out there.