Bookkeeping 101: What Paperwork Do I Need to Track?

Every business generates mountains of paperwork, also called source documents. Most of it provides critical back up for the entries that will be made in the accounting system. It's important right from the beginning that you set up a system to track, record and store these documents, for internal management and external taxation purposes.

Time and time again, in my accounting practice I see small businesses that are literally buried in paperwork. They know enough to hang on to the paper, but not how to control it. Every large company has documented systems for filing and recording source documents, and if you want to succeed in business, you should too.

Let's break down source documents by type:

1) Invoices
Every time you make a sale to a customer, you will generate an invoice that describes all the information regarding the sale: the date, what was sold, the amount, any taxes and payment terms. If you run a retail business with a cash register, your register tapes function as invoices.

You will need at least two and probably three copies of every invoice. The customer will get one for their records (they have to enter it in their accounting system too!) and you will need to keep one so that you can record it in your accounting system. You may choose to generate a third copy to keep in your accounts receivable folder until paid. This way, you would have one set of records ordered by date sale was made (most useful for accounting purposes) and one set of records ordered by date money was received (most useful for tracking cash flow).

2) Statements of Account
You will undoubtedly have customers who owe you money at the beginning of every month. It is a good idea to send them a Statement of Account monthly so that they can see how much is still owed to you, how old the invoice is and the details of any payments that have been applied to their accounts. A Statement of Account is like a snapshot at a particular spot in time of what transactions have occurred with that particular customer.

3) Deposit slips
When a customer pays you, you will have to deposit the money into your business bank account. You will prepare a deposit slip to do this. Although some banks do not require you to use deposit slips, you should prepare them anyway as they are an accurate record of who has paid you. Think of what would happen if you received checks from four customers on the same day. If the amount is just shown on your bank statement as a lump sum, how will you remember two months from now where the money came from? By preparing a deposit slip.

4) Supplier invoices
Every time you purchase anything for your business, it's important to get an invoice or a cash register receipt. Why? For starters, if you were ever audited by your taxing authority, they would need to see the original receipt to prove that it really was a business expense and not your personal trip to Maui. Also, you may need to account for the taxes you pay on the expense in your accounting system and the supplier invoice provides that breakdown.

5) Check stubs or copies
When you write a business check to a supplier, you should have a copy of that check for your records. Many check styles include a check stub- the piece that stays in your checkbook after you tear off the check. It has spaces to record all of the information that would have appeared on the check you just wrote, including who it's made out to, the date, the total payment and the tax portion. In a manual accounting system, these check stubs will be what you use to enter your supplier payments.

Some check systems print 3 copies of each check; the actual check, an attached copy for the recipient and a third copy for the sender. In this case, you would save the third copy and keep in check order.

6) Purchase orders
You may or may not have these in your business. When you order goods from a supplier, you may fill out a purchase order first. This order would not include prices but would show quantities and types ordered. You may also receive purchase orders from your customers. If you use these, you would keep them with your invoices, making sure that what was ordered was what was supplied.

7) Bank statements
For most business accounts, you will receive a bank statement at the end of the month showing the activity for that month. This will be one of your critical control documents for your business. You will need to reconcile your accounting system to your bank statements to make sure that you have accounted for every transaction.

8) Canceled checks
You will most likely get back all of your checks that were cashed in the month with your bank statement. It is useful to keep these in case you ever have to prove to a supplier that you paid an invoice. The bank stamp on the back of the check carries information as to when and where the check was cashed.

Your bookkeeping system doesn't need to be elaborate when you first start out. But keeping track of these basic documents will help you organize your business down the road.