For a lot of reasons, including an IRS audit, a good recordkeeping system includes a summary of your business transactions. Business transactions are ordinarily summarized in ledgers and journals.
A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.
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.
Whether you keep ledgers 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:
Employee compensation records
Check disbursements journal
Daily summary of cash receipts
Monthly summary of cash receipts
The system you use to record business transactions will be more effective as you follow good recordkeeping practices. Generally, it is best to record transactions on a daily basis. For example, record expenses when they occur, and identify the source of recorded receipts.
The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, you can meet your burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Additional evidence is required for travel, entertainment, gifts, and auto expenses. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.
For expert representation before the IRS or California Franchise Tax Board, please call Mitchell A. Port at 310.559.5259.