Assets. Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure the annual depreciation and the gain or loss when you sell the assets. Your records should show the following information.

• When and how you acquired the asset.

• Purchase price.

• Cost of any improvements.

• Section 179 deduction taken.

• Deductions taken for depreciation.

• Deductions taken for casualty losses, such as losses resulting from fires or storms.

• How you used the asset.

• When and how you disposed of the asset.

• Selling price.

• Expenses of sale.

Documents that may show this information include the following.

• Purchase and sales invoices.

• Real estate closing statements.

• Canceled checks.

What if I don't have a canceled check? If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. These include account statements prepared for the financial institution by a third party. The following is a list of acceptable account statements.

1. An account statement showing a check clearing is accepted as proof if it shows the following.

   1. Check number.

   2. Amount.

   3. Payee's name.

   4. Date the check amount was posted to the account by the financial institution.

2. An account statement showing an electronic funds transfer is accepted as proof if it shows the following.

   1. Amount transferred.

   2. Payee's name.

   3. Date the transfer was posted to the account by the financial institution.

3. An account statement showing a credit card charge (an increase to the cardholder's loan balance) is accepted as proof if it shows the following.

   1. Amount charged.

   2. Payee's name.

   3. Date charged (transaction date).

These account statements must be highly legible.

Proof of payment of an amount alone does not establish that you are entitled to a tax deduction. You should also keep other documents, such as credit card sales slips and invoices, discussed previously.

Recording Business Transactions

A good recordkeeping system includes a summary of your business transactions. (Your business transactions are shown on supporting documents just discussed.) Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store.

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.

A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.

Whether you keep journals 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.

• Business checkbook.

• Daily summary of cash receipts.

• Monthly summary of cash receipts.

• Check disbursements journal.

• Depreciation worksheet.

• Employee compensation record.

The business checkbook is explained next. The other items are illustrated later under Sample Record System.

Whichever system you use to record business transactions will be most effective if you follow good recordkeeping practices. For example, record expenses when they occur, and identify the source of recorded receipts. Generally, it is best to record transactions on a daily basis.

Business checkbook. One of the first things you should do when you start a business is open a business checking account. You should keep your business account separate from your personal checking account.

The business checkbook is your basic source of information for recording your business expenses. You should deposit all daily receipts in your business checking account. You should check your account for errors by reconciling it. See Reconciling the checking account, later.

Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. You should also note on the deposit slip the source of the deposit and keep copies of all slips.

You should make all payments by check to document business expenses. Write checks payable to yourself only when making withdrawals from your business for personal use. Avoid writing checks payable to cash. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment.

Use the business account for business purposes only. Indicate the source of deposits and the type of expense in the checkbook.

Reconciling the checking account. When you receive your bank statement, make sure the statement, your checkbook, and your books agree. The statement balance may not agree with the balance in your checkbook and books if the statement:

• Includes bank charges that you did not enter in your books and subtract from your checkbook balance, or

• Does not include deposits made after the statement date or checks that did not clear your account before the statement date.

By reconciling your checking account, you will:

• Verify how much money you have in the account,

• Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and

• Correct any errors in your bank statement, checkbook, and books. You should reconcile your checking account each month.

Before you start to reconcile your monthly bank statement, check your own figures. Begin with the balance shown in your checkbook at the end of the previous month. To this balance, add the total cash deposited during the month and subtract the total cash disbursements.

After checking your figures, the result should agree with your checkbook balance at the end of the month. If the result does not agree, you may have made an error in recording a check or deposit. You can find the error by doing the following.

1. Adding the amounts on your check stubs and comparing that total with the total in the "amount of check" column in your check disbursements journal. If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal.

2. Adding the deposit amounts in your checkbook. Compare that total with the monthly total in your cash receipt book, if you have one. If the totals do not agree, check the individual amounts to find any errors.

If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct.

When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. Many banks print a reconciliation worksheet on the back of the statement.

To reconcile your account, follow these steps.

1. Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all differences in the dollar amounts.

2. Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks.

3. Prepare a bank reconciliation. One is illustrated later under Sample Record System.

4. Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly.

At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. If you still have differences, check the previous steps to find errors.

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