Your tax year is established when you file your first federal income tax returns. You must continue to use this tax year unless you get permission from the Internal Revenue Service to change it.
You may use one of two basic accounting methods to record your business transactions: cash method or accrual method. You must use the same method of accounting for determining your New York taxable income as you use for federal income tax.
Most taxpayers use the accrual method of accounting. The following must use the accrual method:
Using the cash method, you report income when the money is actually received, and report expenses when the bills are actually paid. Using the accrual method, you report income when it is earned (whether you’ve received payment or not), and report expenses when they are incurred.
Generally, you may use either the cash or the accrual method or a combination of the two as long as you apply your accounting method consistently (However, if the production, purchase or sale of merchandise is an income-producing factor, you must keep inventory records to clearly show income, and you must use the accrual method to record your purchases and sales).
If you operate more than one business, you may use different accounting methods for each. You must keep complete records and separate books for each business.
You may also choose one of two bookkeeping systems: single-entry or double-entry. The single-entry system is easier to keep; the double-entry system, although more complex, assures better accuracy and control.
In double-entry bookkeeping you keep journals and ledgers. Transactions are entered in a journal and then, at certain times, summary totals are posted to ledger accounts showing income, expenses, assets, liabilities and net worth. The system is self-balancing because each transaction is shown as a debit entry in one account and a credit entry in another. Total debits must always equal total credits; if they don’t, it is evident an error has been made.
At the end of an accounting period, you will be able to prepare a profit and loss statement reflecting current operations and a balance sheet showing the overall financial position of your business.
Single-entry bookkeeping concentrates on the profit and loss statement and not the balance sheet. It is a partial system that records the flow of income and expense using a daily summary of cash receipts, a monthly summary of receipts and a monthly check disbursements journal.
You begin the day with a fixed amount of petty cash in the cash register ($25.00) in this example). That allows you to make change and make small payments without writing checks. Every time you make a payment from the cash register, fill out a petty cash slip and place it with the receipts in the cash register.
At the end of the day, total the amount of sales and sales tax shown on your cash register tape or sales slips. Enter these amounts ($53.75) and ($3.76) on the summary sheet and add them to get the total receipts ($57.51) for the day. Count the money in the cash register ($76.51) and add any petty cash slips ($6.00) to find the total cash ($82.51). Then subtract your initial petty cash amount ($25.00) to determine the total cash deposits for the day. This figure must be the same as the total receipts ($57.51).
Deposit your day’s receipts into your business checking account. You will begin the next day with $19.00 cash and $6.00 in petty cash slips in the cash register. When the petty cash slip total approaches your fixed amount of petty cash, write a check made out to “petty cash” for the amount of the outstanding slips, cash the check, and add the cash to the register.
Transfer total receipts, sales tax and cash sales (net sales) from each daily summary to a monthly summary and total. Net sales totals give you your monthly taxable income ($1,612.33).
Your monthly summary sheet will also provide the records necessary to prepare your New York State sales and local use tax returns.
You should deposit all receipts in a separate business checking account and , if possible, make all disbursements by check. Your canceled checks will be proof of your business expenses. Avoid making check payable to “cash” or payable to yourself (except for income withdrawals). Payments made from petty cash should be documented by petty cash slips and receipts.
All checks drawn on your business account should be entered daily in your journal. This enables you to keep track of total expenses and break them down into categories for income tax purposes.
For each check you write, enter the date (June 4), the payee (First Bank) and total amount ($84.64) and extend it to the proper column. In some cases (petty cash, for example) you will make entries in several columns. At the end of the month, add each column to determine total expenses. You may want to prepare an annual summary to help in preparation of your income tax returns.
These same records will provide the information you need to prepare your New York State and local sales and use returns. Your daily and monthly summaries indicate the amount of gross sales, taxable sales and sales tax you collected. Your cash register tapes or sales slips (with sales tax separately stated) must be available for inspection for three years.
For more information, see Publication 752, Record Keeping for Sales Tax Vendors, and FormST-150, General Instructions for State and Local Sales Use Taxes.
If you pay someone to work for you, you’re an employer and you will be required to keep additional records. All records supporting your tax returns, as well as the returns themselves, should be kept for at least three years (four years for employer information) after your return is filled.
You have been provided with a brief introduction to keeping business records. Federal Publication 334, Tax Guide for Small Business, will provide you with additional information. You must determine what kind of system will be most comfortable for you and best suited to your business needs.
Office supply stores sell a variety of complete bookkeeping systems as well as any record-keeping forms and other materials that may help you.