From the Shoe Box to the Tax Return

At Seacoast Accountability, we get asked all the time, “What is the easiest way for me to organize all of those receipts?”  I am going to take you through the process of organizing that pile, checking for missed receipts, and how to file it all away so you can find it in the event of an audit.  I am going to write this from a small business perspective, but you may find several helpful hints that would apply to your personal bookkeeping and filing, as well.

 As most of you know, I am a QuickBooks user.  I just love the online banking feature in QuickBooks, which allows me to download all of my transactions directly from the bank into my software.  The first thing you should have done, as a small business owner, is to establish a separate bank account for your business.  The second thing you should do on a regular basis, is to reconcile that bank account monthly.  This helps to establish that your business is not just a hobby, is separate from your personal life, and reconciling verifies that everything going through the account is recorded, and recorded correctly.

With that said, I go through the pile of receipts paying close attention to the last four digits of the debit/credit card number on the receipt.  Make separate piles of receipts, by account used (business or personal accounts, debit or credit cards), and a separate pile for those receipts where you paid in cash.  You can make a little cheat sheet, listing the last four digits of the card and the bank or credit card account that it corresponds to. 

The next thing I do is to put those piles in reverse chronological order.  If you established a separate business account, are a QuickBooks user, and use the online banking function, then that pile that relates to your business account should be all set once you complete the transactions in the online banking module.  Reconcile for the month(s).

If you do not use the online banking function, or don’t use QuickBooks at all, then take the business bank statements for each month and compare to the business account receipts.  Make a check mark next to each entry on your bank statement that you have a receipt for.  Examine the receipt and write the expense or other category that the receipt should be coded to next to the transaction listed on the bank statement and again on the bottom of the receipt.  Those not having a check mark and notation, do not have a corresponding receipt.  Highlight those, and try to identify the type of expense or other category that they should be coded to, and make a note next to the transaction on the bank statement.  You can now record these transactions, from the bank statement, in an Excel spreadsheet, or on an old fashion green ledger pad.  If you do not use accounting software, during the year I suggest keeping a record of  transactions in a manual check register for the business account, and note the type of expense next to the name of who you paid.  This will make this process easier and enable you to reconcile the business account.

Repeat this process for each pile of receipts.  For example, if another pile represents receipts for transactions from a personal account, then pull the bank or credit card statements for that account, make a check mark next to those transactions that have a receipt, and make a note of the expense to code to.   Once you finish cross referencing the receipts to the statements, go through and review each transaction, looking for possible business items that may have been handled through your personal account, but don’t have a receipt.  Highlight and investigate.  If it is in fact a business transaction, make a note of what it is going to be coded as, next to the transaction on the statement.

So let’s get a little into the coding of receipts.  I mentioned a separate pile of cash receipts, and coding to expense or another category.  If you are using QuickBooks, or some other form of accounting software that produces an income statement and a balance sheet, any business receipts that are associated with cash or have been funded by a  personal account, are considered an investment in your company.  You will have to make a journal entry, posting the amount  as a debit to an expense account, and a credit to owner/member paid in capital (equity account) or some sort of loan, depending on the circumstances.  If you are unsure of how to do this, give us a call or shoot us an email.  If you are still co-mingling your business and personal transactions in one account, then keep posting to the proper expense category in Excel or on your green ledger pad, and be sure to get yourself a separate business account set up as soon as possible.

In addition to paying money for expenses, you may have also purchased a big ticket item during the year, or made a loan payment, for example.  In general terms, according to the IRS, anything that has a useful life of more than one year needs to be depreciated, and is considered a fixed asset, not an expense.  In addition, accountants typically use a dollar amount as a rule of thumb in determining if an expenditure is an asset or an expense.  For example, if you bought a computer during the year, put this in an equipment column, rather than as a supply or office expense, so that it is readily identified as needing depreciated.  Payments on a loan are split between the amount of principal and interest, and coded accordingly.  If you have a question about expenses or “other categories”, feel free to contact us.

Once the expense receipts are entered, I file the receipts by the expense or other category that I posted to.  I highlight the account number on the receipt, if the transaction is not from the business account.  I file my bank statements in a bank folder, along with the reconciliations, and the cheat sheet cross referencing the personal card numbers on the receipts with the corresponding bank account.  In the event of an audit, the IRS is going to ask about expense categories, so I find it helpful to file by category in some type of chronological order for easy matching to my summary reports and bank statements.

Although the focus of this post is on money going out of your account(s), I do want to mention an important tip about recording money coming into your account.  When making a deposit into your account, be sure to write down the client or customer name, check number, and amount of the money received from that customer.  This will save you headaches down the road, if you need to investigate a customer balance.  This can be done in a check register, or on the deposit ticket itself.  More and more banks allow you to scan the actual checks that make up the deposit.  Your bank statement will reflect a total deposit amount, and will not give you the detail of what customer payments make up that deposit amount.  Create a file for each customer, containing estimates, invoices, and information about payments made.

This process can be simplified significantly by keeping business and personal finances separate.  If you need to fund the business account with personal funds, make a whole dollar transfer to the business account, and pay the business expenses with the business debit/credit card or by business check.  Likewise, if you need to pay yourself from the business, take a whole dollar draw from the business and put it into your personal account, and pay the personal expenses on the personal debit/credit card or by personal check.  Once you get separate accounts set up and discipline yourself to use them accordingly, there should just be the occasional cash receipt or slip up when the wrong card was used.   Simply create a folder “to be entered”  to hold those receipts and enter them into your system at least quarterly.

For more bookkeeping tips, feel free to call us at (603) 834-1271, or shoot us an email at info@SeacoastAccountability.com.

Disclaimer: This post is intended to provide general information about the subjects posted.  It should no way be construed as tax or financial advisement.