Publication 583 - Kinds of Records to Keep
Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping
system suited to your business that clearly shows your income and expenses.
The business you are in affects the type of records you need to keep for federal tax purposes. You should set up
your recordkeeping system using an accounting method that clearly shows your income for your tax year. See
Accounting Method, earlier. If you are in more than one business, you should keep a complete and separate set of
records for each business. A corporation should keep minutes of board of directors' meetings.
Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily
made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as
well as your deductions and credits. For most small businesses, the business checkbook (discussed later) is the
main source for entries in the business books. In addition, you must keep supporting documents, explained next.
Purchases, sales, payroll, and other transactions you have in your business generate supporting documents.
Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These
documents contain information you need to record in your books.
It is important to keep these documents because they support the entries in your books and on your tax return.
Keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or
Gross receipts. Gross receipts are the income you receive from your business. You should keep supporting
documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include
- Cash register tapes.
- Bank deposit slips.
- Receipt books.
- Credit card charge slips.
- Forms 1099-MISC.
Purchases. Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this
includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting
documents should show the amount paid and that the amount was for purchases. Documents for purchases
include the following.
- Canceled checks.
- Cash register tape receipts.
- Credit card sales slips.
These records will help you determine the value of your inventory at the end of the year. See Publication 538 for
information on methods for valuing inventory.
Expenses. Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting
documents should show the amount paid and that the amount was for a business expense. Documents for
expenses include the following.
- Canceled checks.
- Cash register tapes.
- Account statements.
- Credit card sales slips.
Petty cash slips for small cash payments.
A petty cash fund allows you to make small payments without having to write checks for small amounts. Each time
you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of
Travel, transportation, entertainment, and gift expenses. Specific recordkeeping rules apply to these
expenses. For more information, see Publication 463.
Employment taxes. There are specific employment tax records you must keep. For a list, see Publication 15.
Assets. Assets are the property, such as machinery and furniture you own and use in your business. You must
keep records to verify certain information about your business assets. You need records to figure the annual
depreciation and the gain or loss when you sell the assets. Your records should show the following information.
- When and how you acquired the asset.
- Purchase price.
- Cost of any improvements.
- Section 179 deduction taken.
- Deductions taken for depreciation.
- Deductions taken for casualty losses, such as losses resulting from fires or storms.
- How you used the asset.
- When and how you disposed of the asset.
- Selling price.
- Expenses of sale.
The following documents may show this information.
- Purchase and sales invoices.
- Real estate closing statements.
- Canceled checks.
What if I don't have a canceled check? If you do not have a canceled check, you may be able to prove
payment with certain financial account statements prepared by financial institutions. These include account
statements prepared for the financial institution by a third party. These account statements must be highly legible.
The following table lists acceptable account statements.
Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. You should also
keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost.
Recording Business Transactions
A good recordkeeping system includes a summary of your business transactions. (Your business transactions are
shown on the supporting documents just discussed.) Business transactions are ordinarily summarized in books
called journals and ledgers. You can buy them at your local stationery or office supply store.
A journal is a book where you record each business transaction shown on your supporting documents. You may
have to keep separate journals for transactions that occur frequently.
A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.
Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. For
example, a recordkeeping system for a small business might include the following items.
- Business checkbook.
- Daily summary of cash receipts.
- Monthly summary of cash receipts.
- Check disbursements journal.
- Depreciation worksheet.
- Employee compensation record.
The business checkbook is explained next. The other items are illustrated later under Sample Record System.
The system you use to record business transactions will be more effective if you follow good recordkeeping
practices. For example, record expenses when they occur, and identify the source of recorded receipts. Generally,
it is best to record transactions on a daily basis.
Business checkbook. One of the first things you should do when you start a business is open a business
checking account. You should keep your business account separate from your personal checking account.
The business checkbook is your basic source of information for recording your business expenses. You should
deposit all daily receipts in your business checking account. You should check your account for errors by
reconciling it. See Reconciling the checking account, later.
Consider using a checkbook that allows enough space to identify the source of deposits as business income,
personal funds, or loans. You should also note on the deposit slip the source of the deposit and keep copies of all
You should make all payments by check to document business expenses. Write checks payable to yourself only
when making withdrawals from your business for personal use. Avoid writing checks payable to cash. If you must
write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you
cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of
Use the business account for business purposes only. Indicate the source of deposits and the type of expense in
Reconciling the checking account. When you receive your bank statement, make sure the statement, your
checkbook, and your books agree. The statement balance may not agree with the balance in your checkbook and
books if the statement:
- Includes bank charges you did not enter in your books and subtract from your checkbook balance, or
- Does not include deposits made after the statement date or checks that did not clear your account before the
By reconciling your checking account, you will:
- Verify how much money you have in the account,
- Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking
- Correct any errors in your bank statement, checkbook, and books.
You should reconcile your checking account each month.
Before you reconcile your monthly bank statement, check your own figures. Begin with the balance shown in your
checkbook at the end of the previous month. To this balance, add the total cash deposited during the month and
subtract the total cash disbursements.
After checking your figures, the result should agree with your checkbook balance at the end of the month. If the
result does not agree, you may have made an error in recording a check or deposit. You can find the error by
doing the following.
1. Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column
in your check disbursements journal. If the totals do not agree, check the individual amounts to see if an error was
made in your check stub record or in the related entry in your check disbursements journal.
2. Adding the deposit amounts in your checkbook. Compare that total with the monthly total in your cash receipt
book, if you have one. If the totals do not agree, check the individual amounts to find any errors.
If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make
sure additions and subtractions are correct.
When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling
your checkbook with the bank statement. Many banks print a reconciliation worksheet on the back of the statement.
To reconcile your account, follow these steps.
1. Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all
differences in the dollar amounts.
2. Compare each canceled check, including both check number and dollar amount, with the entry in your
checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared
the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your
3. Prepare a bank reconciliation. One is illustrated later under Sample Record System.
4. Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service
charges) or recorded incorrectly.
At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. If you still have
differences, check the previous steps to find the errors.
Table 3. Period of Limitations
You must decide whether to use a single-entry or a double-entry bookkeeping system. The single-entry system of
bookkeeping is the simplest to maintain, but it may not be suitable for everyone. You may find the double-entry
system better because it has built-in checks and balances to assure accuracy and control.
Single-entry. A single-entry system is based on the income statement (profit or loss statement). It can be a
simple and practical system if you are starting a small business. The system records the flow of income and
expenses through the use of:
1. A daily summary of cash receipts, and
2. Monthly summaries of cash receipts and disbursements.
Double-entry. A double-entry bookkeeping system uses journals and ledgers. Transactions are first entered in a
journal and then posted to ledger accounts. These accounts show income, expenses, assets (property a business
owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). You close income and
expense accounts at the end of each tax year. You keep asset, liability, and net worth accounts open on a
In the double-entry system, each account has a left side for debits and a right side for credits. It is self-balancing
because you record every transaction as a debit entry in one account and as a credit entry in another.
Under this system, the total debits must equal the total credits after you post the journal entries to the ledger
accounts. If the amounts do not balance, you have made an error and you must find and correct it.
There are computer software packages you can use for recordkeeping. They can be purchased in many retail
stores. These packages are very helpful and relatively easy to use; they require very little knowledge of
bookkeeping and accounting.
If you use a computerized system, you must be able to produce sufficient legible records to support and verify
entries made on your return and determine your correct tax liability. To meet this qualification, the
machine-sensible records must reconcile with your books and return. These records must provide enough detail to
identify the underlying source documents.
You must also keep all machine-sensible records and a complete description of the computerized portion of your
recordkeeping system. This documentation must be sufficiently detailed to show all of the following items.
- Functions being performed as the data flows through the system.
- Controls used to ensure accurate and reliable processing.
- Controls used to prevent the unauthorized addition, alteration, or deletion of retained records.
- Charts of accounts and detailed account descriptions.
Microfilm and microfiche reproductions of general books of accounts, such as cash books, journals, voucher
registers, and ledgers, are accepted for recordkeeping purposes if they comply with Revenue Procedure 81-46 in
Cumulative Bulletin 1981-2.
Electronic Storage System
Records maintained in an electronic storage system are accepted for recordkeeping purposes if the system
complies with Revenue Procedure 97-22 in Cumulative Bulletin 1997-1.
An electronic storage system is one that either images hardcopy (paper) books and records or transfers
computerized books and records to an electronic storage media, such as an optical disk.
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