Organizing Tax Information Part 2 - Keeping Up with Receipts and Deductions
Time for my small business accounting & organizational class. This post is kind of long, so I hope you'll indulge me. It's hard to take steps in a business procedure and condense them down, but I think I did an okay job. At least I hope I did. If it sounds confusing or weird, just let me know. Before I begin, let me say that I am not a trained accountant. But I did work in accounts receivable for a few years, and I had to deal with packing lists and invoices on a daily basis and handle record keeping for computer files and physical files. So that experience taught me a lot about organizing and the importance of coming up with a system that works for me, and I've based my own home accounting and record keeping practices on the systems that I've learned in business. I've just put it on a smaller scale. As I've said, everyone has their own way of doing things. What works for me, may not work for you, but maybe my ideas will help somebody or at least give others an idea for a system that will work for them.
This system is primarily used to keep up with expenses that are tax deductible (business or non business), and it's a simple, time-friendly system that you can use throughout the year.
First of all, throughout the year I keep all my papers in a "temporary" file box, until I'm ready to go through them, and the file box contains hanging folders for various kinds of paper work (bills, new mail, and so forth). For my accounting purposes, I have 2 folders in the box for receipts. One is for personal receipts, and the other is for business receipts. About once a week or so, I empty the folders and enter the totals for the receipts onto a spreadsheet. The personal reciepts are entered into my "monthly budget" spreadsheet and are then thrown away. But business receipts (and other important receipts) are entered onto a separate spreadsheet for business expenses and are then copied and filed. (Note - After I pay bills, I place them in the receipt folder as well, so that they can be counted along with all my other receipts.)
At the beginning of the year, I create a spreadsheet/workbook in Excel. You could create an Access database if you prefer or use some other accounting software, but Excel is pretty sufficient for my particular system. (and if you don't have excel, Google has an online spreadsheet program that's free) My spreadsheet is primarily for business expenses, but you can use it to calculate any expenses you like.
For organizational purposes, I create separate worksheets within the workbook for various kinds of expenses. For example, my husband has a truck that he uses for his business, and every time he gets an oil change or has work done on the truck, those totals go on a worksheet labeled, "Truck." Another worksheet is labeled, "Gas," which obviously is for gasoline totals. Another worksheet is for "Office supplies" and so on.
And basically each worksheet contains a list of expense records. At the top of the worksheet, there is title and underneath the title are the headings which my information is entered under. The headings I use are as follows: Date, Vendor, Item Description, Total. Each receipt that I get becomes a record/line item on the worksheet, and all the information from the receipt is entered under the headings.
Before or after the receipt info. is entered into the spreadsheet, I attach the receipt to a sheet of printer paper. To save paper, I usually attach 2-4 small receipts on to the same sheet of paper. After attaching the receipts and entering all the receipts into my spreadsheet, I make a copy of all the receipts. Then I punch holes in the papers and place them in my Business Expense binder. I have one binder for the original receipts, and one for the copies. (I make the copies b/c sometimes the ink on receipts tends to fade, and I just like having 2 copies. I also got pretty use to the practice when working with monthly credit card statements at my old job.)
Each expense binder is "equipped" with tabs/subject dividers. The labels on the tabs match the labels on the worksheets of my spreadsheet, and the receipts are filed behind the appropriate tab. By creating "expense categories" for your computer spreadsheet and your physical/paper files, it is much easier to stay organized and to keep a check of your records to make sure that they match. It also makes it easier for you to find a specific record.
We've managed to file all of our receipts for the year in a single binder. (with the copies in a second binder) But if you have a lot of receipts, you may want to use more than binder. You may even want to create tabs for specific vendors that you use a lot. And of course, if you're business is bigger, than you can always apply this system to a filing cabinet.
Not Just For Businesses
I know that I've focused on small businesses, and many of us don't have businesses, but this system can be applied to individuals as well. I've used this same system to keep up with receipts for college books. (I don't worry about keeping up with tuition totals b/c the school sends us a tax form w/ that info) And you could use this system for other expenses/tax deductions as well, from medical expenses to charitible donations. (or use a less detailed version for your home budget)
Filing Your Taxes and being Prepared for an Audit.
When it comes time to file your taxes, simply print out all your spreadsheets and use the grand totals for your deductions. No need to to pull out your receipts except to double check your totals. (if you use an accountant, having a spreadsheet or list of totals will make his job easier too.)
You should still keep your receipts in the event of an audit. And I've been advised by an accountant that if you are ever audited it looks much better (to the auditors) if you have a folder or binder of receipts that is neat and organized rather than a box or folder full of loose receipts.
For those of you who don't like to keep paper files and prefer to scan your receipts, that is fine too, as long as you can can quickly print and organize your receipts in the event of an audit. The most important thing is that you are able to take any record from your spreadsheet or computer database and quickly locate the receipt for that record.
Well, that's about all I can think of. I hope this helps.