Utah State Tax Commission
Record Keeping Workshop
General
The majority of businesses today use a computerized accounting system for their record keeping. However, even if you automate your record system, you must keep on file and readily available the source documents to substantiate the entries on your system.
Whether you use an automated record system or a manual record system, you need to organize and file the source documents. Generally, it is best to keep your filing system as simple as possible. Your goal is to have a system that insures quick identification and retrieval of documents. In your planning some or all of these considerations need to be addressed:
| Who will use the records | How often will the records be used |
| Number of records created | Who needs to access the records |
| How long will the records remain current | Where are you going to store records |
| Legal requirements to keep records | Growth considerations |
You also need to consider whether your files will be centralized or decentralized. Centralized filing places your records in one location in your office. This method is best when most of your employees need access to the files. Some benefits of a centralized system are:
- Better control
- Easier to maintain
- No duplication of records
- Less equipment and space
- All information in one location
Decentralized filing locates specific records in different locations. This method works best when only one person needs access to a set (series) of files. There are three benefits that may be derived by using this method:
- Less chance of misplacing files
- Limited access allows greater security and confidentiality of the records
- Records are closer to the individual who needs them
The types (classification) of files you establish will depend upon the nature of your business. How you organize them is a personal preference. The primary thing is that your paper files are organized so you can quickly locate the documents you need to accomplish the following tasks:
Complete your tax returns |
Return goods covered under warranty |
Conduct audits (internal, state and federal) |
Update payroll information |
Collect on delinquent customer accounts |
Apply for loans |
Make timely payments to creditors |
 |
Once you have determined the types or categories of files your next step will be to determine how to organize the records within the category. They might be filed alphabetically by vendor, by date or by subject. Once you decide on the method, do not change. This is very important, especially for sales tax documentation.
Remember that sales and use tax must be accounted for on an accrual basis. This means the tax is due in the reporting period when the bill is received or sent, not when it is paid. Filing of your documents need to take this into account.
The rest of our discussion in this section addresses some concepts you might consider when filing different types of records.
Customer Files
Each of your customers should have a separate file (filed alphabetically), which contains information such as:
- The customer's name, current address, telephone, fax, e-mail address, or other means of electronically contacting your customer.
- Is the customer a tax exempt organization? Customers making tax exempt purchases must provide you with an
exemption certificate form TC-72. You must keep on file exemption certificates to substantiate any tax exempt sales. Businesses who do not have an exemption certificate on file will be assessed the sales and use tax.
- You only need one certificate per customer regardless of the number of purchases made by the customer.
- If you have several tax exempt customers it may be better to consolidate all of your tax exempt customer's
exemption certificates into one file.
- Here is a suggestion for businesses who sell parts tax exempt for resale, or businesses who have numerous exempt sales. If your cashiering system is not automated to identify customers who are tax exempt, prepare and sort alphabetically a Word list or Excel data base of all of your tax exempt customers (you have a tax exemption certificate on file). Print copies of the alphabetical list for your sales personnel or cashiers so they can verify the exempt status of your customers without accessing your permanent file of exemption certificates. This small tip could save you hours of sorting and repairing files that have been disorganized by employees.
- Review your certificates annually.
- If a customer has changed business entities (e.g. partnership to a corporation) a new certificate is required.
- Remove certificates of businesses who no longer do business with you, or who have changed entities.
- Copy of any agreements, contracts, or other pertinent information you deem necessary.
These records are necessary so you can set up your accounts receivables and properly invoice your customers.
Accounts Receivable (Customer Invoices)
These are the business transactions between you and your customers that show your gross receipts from sales, or rental payments from leases, or services performed on tangible personal property. Documentation substantiating these transactions will include invoices or sales receipts for goods sold to your customers. Your business invoices need to be filed systematically.
One way to file your records is by invoice number filed sequentially by date and month. Invoices filed using this method are readily available and it is easier to monitor the status of your accounts. The following example shows files that have been organized using this method:
MONTH |
INVOICE # |
DATE |
CUSTOMER |
January |
1001 |
9 |
Able Mechanics |
| |
1002 |
16 |
Mike's Auto Repairs |
1003 |
23 |
Stellar Services |
|
February |
1004 |
7 |
Mike's Auto Repairs |
|
1005 |
19 |
Able Mechanics |
March |
1006 |
4 |
Able Mechanics |
| |
1007 |
21 |
Stellar Services |
1008 |
24 |
Able Mechanics |
Setting up your files in this manner makes it easier to identify invoices and receipts that apply to your tax returns. If you were required to file a quarterly sales and use tax return, these eight sales invoices would be reported on your first quarter's sales and use tax return.
Another method of filing sales invoices for the year is to file them alphabetically by customer (vendor or seller). Invoices for each customer would be filed sequentially, the earliest invoice to the latest invoice. It may be more difficult to find an invoice using this method. The following example illustrates how files would be organized using this method:
CUSTOMER FILE |
INVOICE # |
DATE |
Able Mechanics |
1008 |
March 24, 2007 |
| |
1006 |
March 4, 2007 |
1005 |
February 19, 2007 |
|
1001 |
January 9, 2007 |
|
Mike's Auto Repairs |
1004 |
February 7, 2007 |
|
1002 |
January 16, 2007 |
Stellar Services |
1007 |
March 21, 2007 |
|
1003 |
January 23, 2007 |
It is harder to locate invoices using this method. Consequently it will be more difficult to monitor your accounts and prepare your sales and use tax returns.
It does not matter which filing system you choose to use for your business. However, it is important that once you have started a filing system you need to be consistent and stay with that system. Changing filing systems creates confusion and makes it very difficult to monitor your accounts.
Accounts Payable (Vendor or Seller Invoices)
These are your outstanding bills for goods and services you have purchased from sellers (vendors).
You need to have a separate vendor file (filed alphabetically) businesses who provide services to you throughout the year. The vendor file will contain information such as:
- The vendor's name, current address, telephone, fax, e-mail address, or other means of electronically contacting them.
- A copy of a completed and signed form W-9 , Request for Taxpayer Identification. This form provides necessary information for preparation of forms 1099-MISC, Miscellaneous Income Statements. If you pay a business $600 or more for services and the vendor is not a corporation you must issue them a 1099-MISC.
- A copy of worker's compensation coverage. If a vendor is not covered and one of the vendor's employees is injured while providing services to your business, you will become liable.
- A copy of any trade or business license.
- A copy of any agreements, contracts, or other pertinent information you deem necessary.
You must maintain records to document bills for goods and services you have purchased. Records that document your expenses include items such as:
- Vendor (seller) invoices
- Bills
- Cancelled checks
- Cash register Tapes
- Receipts
- Credit card charges
Each form of documentation you use to substantiate your business expenses needs to answer the six "W's":
- Who
- What
- When
- Where
- Why
- and why so much
In addition, purchase invoices should reflect if sales tax has been charged. If the seller's invoice does not include sales and use tax, you (the buyer) are responsible for paying the tax. The tax is paid in the following manner:
- If your business does not sell goods and merchandise, and your annual tax liab ility is less than $400, the sales and use tax is claimed on the business income tax return. If you are a sole proprietor the tax will be claimed on your individual income tax return.
- If your tax liability is $400 or greater, you must open a sales tax account and report your taxes on a sales and use tax return.
Purchases are reported and taxed on an accrual basis (pay as you go). If you use an automated data processing (ADP) system, it must be capable of producing visible and legible records for verification of your tax liability. If you elect to automate your documentation, it must conform to Tax Commission Rule R865-19S-22.
Paper copies of purchase invoices are required unless they are scanned into a data file. These invoices should be systematically filed annually by vendor and date. The following example shows how a file may be set up:
SELLER |
DATE |
VOUCHER # |
CHECK # |
| Bill's Warehouse | January 15, 2007 |
V-4513 |
7602 |
|
February 20, 2007 |
V-8761 |
7684 |
March 11, 2007 |
V-9443 |
7714 |
|
April 13, 2007 |
V-10489 |
7789 |
|
| Ralph's Motor Leasing | January 1, 2007 |
C-1001 |
7611 |
|
February 1, 2007 |
C-1002 |
7679 |
March 1, 2007 |
C-1003 |
7715 |
|
| ABC Janitorial Service | January 20, 2007 |
T-502 |
7608 |
|
February 20, 2007 |
T-613 |
7691 |
Employee Files
You need to have a separate employee file for each individual you hire and file them alphabetically. As a minimum you should include the following documents in each employee's file:
- A completed Immigration and Naturalization Service form I-9, Employment Eligibility Verification
- A current signed form W-4, Employee's Withholding Allowance Certificate
- Signed acknowledgement of position title and description, pay rate and payroll periods ( weekly, bi-weekly, semi-monthly or monthly)
- Signed acknowledgement of employment policies and procedures
- Signed application of heath and benefits or acknowledgement that copies were given to the employee
- Any disciplinary or counseling actions
- A copy of their W-2
Assets and Depreciation Schedules
You must keep records to document cost of property and equipment you use in the business. Information to substantiate the depreciation expense, or any gain or loss if you sell an asset includes:
- Cancelled checks
- Credit card statements
- Invoices and closing statements
- Costs of improvements
- Depreciation records
Depreciation schedules are available from the Internal Revenue Service; IRS depreciation information is in Publication 527. Your files need to be able to track the assets you are depreciating to the purchase invoices of those assets. For example:
Asset Description |
Reference Invoice |
In Service Date |
Cost |
Convention Method |
Recovery Period |
Salvage |
Prior Year |
Current Year |
Office furniture and equipment |
C-4035 |
Feb. 1, 2007 |
60,000 |
200% MQ Declining Balance |
7 yrs |
0 |
15,000 |
12,858 |
Computer |
Gala Inc 07-5002 |
July 15, 2007 |
5,000 |
200% HY Declining Balance |
5 yrs |
0 |
0 |
1,000 |
| |
65,000 |
|
0 |
15,000 |
13,858 |
|||
Residential Rental Property |
|
Jan. 1, 2007 |
175,000 |
MM Straight Line |
27.5 yrs |
0 |
6,099 |
6,363 |
Residential Rental Property |
|
June 1, 2007 |
250,000 |
MM Straight Line |
27.5 yrs |
0 |
0 |
4,925 |
| |
425,000 |
|
0 |
6,099 |
11,288 |
|||
|
12 months ending 12/31/2007 |
490,000 |
|
21,099 |
25,146 |
||||
This is a depreciation schedule for office furniture:
Asset Description |
Reference Invoice |
In Service Date |
Convention Method |
Recovery Period |
Year |
Cost |
Depreciation Rate |
Depreciation Amount |
Balance |
| Office equipment |
Furniture Store C-4035 |
Feb. 1, 2007 |
200% HY DB |
7 yrs |
1 |
60,000 |
25% |
15,000 |
45,000 |
| |
2 |
|
21.43 |
12,858 |
32,142 |
||||
| |
3 |
|
15.31 |
9,186 |
22,956 |
||||
| |
4 |
|
10.93 |
6,558 |
16,398 |
||||
| |
5 |
|
8.75 |
5,250 |
11,148 |
||||
| |
6 |
|
8.74 |
5,244 |
5,904 |
||||
| |
7 |
|
8.75 |
5,250 |
654 |
||||
| |
8 |
|
1.09 |
654 |
0 |
||||
Check Registers
Check registers are normally printed on a monthly basis. They would be filed sequentially by month along with your bank reconciliation statements. Your check registers should show the following information:
- The seller (vendor) paid
- Invoice number
- The amount paid
- Date paid
Leases and Contracts
There is no preferred method of how you file copies of your business's leases and contracts. Choose a method that is easiest for you. Generally, they are filed most current to the oldest.
Your leases and contracts must be available for the period of statute of limitations, or three years after the end of the lease
