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BOOK KEEPING FOR SELF EMPLOYED AND SMALL BUSINESSES
Being self employed or having a small business means taking up many roles all on your own. Financial management could be neglected due to time limitations as you focus on developing your existing customers and searching for new ones.
This blog will help you understand the importance of record keeping as a self employed or small business and what’s the best way to do it. So by the end of the blog, you’ll be able to tackle your financial dealings easily and quickly!
Refer to the Table of Contents below for points you want to learn more about.
HOW WE PROCESS?
TABLE OF CONTENTS
- 1. Why keep records as a small business
- 2. Which records are required
- 3. Resources and reference materials
- 4. How to keep records - Traditional and Modern methods
- 5. Best practices for record keeping
- 6. Common mistakes in record keeping
1. Why to keep records as a self employed/small business?
Although you’re not formally required to keep records, it is better to maintain your business records as it helps you answer all IRAS queries.
- Proper record keeping can help your business in many ways like filing correct income tax returns to the IRAS authorities
- Managing cash flow effectively - to pay creditors and collect money from customers on time
- Making better decisions with updated data of your business profit and loss
2. Which documents are required for record keeping
You need documents called source documents to maintain your financial records. Refer to the list below for list of documents required
- Serialized sales invoices
- Purchase and expense receipts
- Bank statements
- Schedules documenting your assets and liabilities
- Any other business records that help you calculate profit and loss
So gather all your business documents now and get on to the next steps where we talk about how to manage them.
3. Resources and reference materials
If you are new to record keeping, you can refer to many trusted sources to get samples, templates and guidelines to ensure you’re keeping records properly such as official website of IRAS where you can find lots of information.
- Record Keeping
- Income Tax Return Filing
- Management Reporting
- Budgeting and Forecasting
- Other Accounting Related Topics
4. How to keep records - Traditional and Modern methods
TRADITIONAL RECORD KEEPING
Traditional record keeping means writing all transactions, for example in a book. These transactions are supported by source documents like invoices, receipts from suppliers and receipts issued to customers. For legibility, maintain photocopies of these receipts before they fade.
Here’s a quick tip :
MODERN RECORD KEEPING
The modern method uses technology to keep records digitally in a computer or an accounting software which is generally accepted to be the more convenient and efficient method.
- Pepare a payment voucher which contains information such as date of purchase, payee’s name, purpose of incurring expense, nature of item, amount of item. This voucher should also be signed by the supplier.
- It helps you record minute details of your business transactions such as sales amount through cash register rolls, supplier particulars, payment details, inventory and stock left, weekly monthly and yearly overview of how much you make - all done quickly and accurately on a computer. You can even transfer all this data to a pendrive and carry wherever you want for easy access.
5. Best practices for record keeping
You must follow good record keeping habits on a regular basis to avoid last minute hassle. Here are some key points to keep in mind while keeping your records – whether manually or digitally –
- Setting up a filing system which is easy to understand for anyone like the audit team.
- Banking in the cash sales regularly to tally weekly and monthly sales.
- Keeping records up to date instead of waiting till the end of month to avoid a large number of transactions to be recorded all at once.
- Separating business and personal expenses.
- Other Accounting Related Topics
- Making references to records like indicating cheque number on invoice.
- Checking and double checking all records for accuracy
- Organizing your records in a legible manner
- Keeping records for minimum 5 years for audit checks by IRAS
6. Common mistakes in record keeping
As a self employed or small business, it is easy to make mistakes due to lack of awareness. We will discuss some common mistakes that you can avoid in your financial record keeping to maintain accuracy and transparency in records.
- DO's
- DONT's
- Record all sales into cash register or record book
- Issue serialized invoices or receipts
- Report gross collection as revenue
- Report purchase and expense separately
- Private vehicle expenses are non deductible even if incurred for business purposes
- Claim only allowable expenses incurred for business
- Amount claimed should justify the service provided and be in line with current market rate
- Claim expenses based on actual amount from invoices and receipts
- Retain records for 5 yrs minimum
- All sources of income taxable so must be reported.
- Personal rental income to be declared under other income section of tax return Business income to be declared under trade section of tax return
- Fail to record all sales received no matter how big or small
- Report estimated sales instead of actual sales
- Report the net amount as revenue
- Claiming motor vehicle expenses such as petrol parking ERP etc in respect of E-plate or S-plate cars
- Claims of private and domestic expenses like family trips, personal entertainment, medical bills etc.
- Claiming your own salary as a sole proprietor or business
- Making excessive payments to related parties like family and friends for services provided to your business
- Payment of salaries, allowances, CPF etc when relatives didn't help out in the business for personal expenses
- Revenue cannot be based on estimates
- Claim estimated expenses
- Claim estimated expenses
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CONCLUSION
It is best to have basic knowledge about business finance management but if you find it difficult or time consuming to do all these tasks yourself, it is suggested that you take professional help.
In the end, now that you have learned the different methods of record keeping, the tips to keep in mind, and common mistakes to avoid, gather your documents and start organizing now!