Business 101: Why You Should Keep Records For Business Transactions

As an accountant, I have come across many business owners who do not understand why they need to keep all their business records and keep them properly.

This is mainly a problem with most startups and a few businesses which have been around for a while but have not managed to get it right yet. Unless you are an accountant, auditor, or have experience with running a business, no one teaches you about proper record keeping until you have to file your tax returns or get audited.

Most startups do not have proper financial records and though they improve as they grow, the information in the first years can be crucial as it documents the basis of your company.

Record keeping is not only important when preparing your financial statements and filing your tax returns, but it is also required by the revenue authority that you keep your records. In Kenya, a lack of proper record keeping attracts penalties to a business or individual.

The Tax Procedure Act states that a business should keep its records for five years from the end of the reporting period. An investigation by the authorities may require records beyond the five-year period where there is gross or willful neglect, evasion or fraud by the taxpayer.

For a small startup, facing budget constraints, the business can have their records on Excel, or scan, and keep documents as soft copies and upgrade as the business grows.

For medium and large scale business, an ERP system would be ideal to ensure all documents are saved and recorded properly. There are different types of ERP systems that can be used. An accountant should be able to advise you on the best ERP system, depending on your company’s needs and budget.

Here are some of the documents that a business should ensure they keep

• Sale invoices/contracts
• Invoices/Receipts or any expense related to the business including purchase of assets
• Contracts and Agreements, e.g., Lease agreements, legal contracts, employee contracts
• Business registration records, e.g., registration certificate, pin certificate, MEMARTS, business permit
• Payroll records
• Bank statements (Include loan statements, cheque counterfoil or any other documentation from the bank)
• Previous Tax Returns (Thanks to Itax these records are now accessible on the web)

A business should keep all records relating to its operations, and thanks to the internet, this has been made easier and efficient. There are several benefits as to why a company should keep all its records. With the main reason being the preparation of financial statements, the other benefits include;

1. Ensures that the financial statements are accurate as the documents are the source and which are used for verification.
2. Records help you monitor the progress of your business.
3. Record-keeping helps make work easier during the preparation and actual audit work.
4. Used in the preparation of tax returns – Tax returns should be supported by actual documents. The burden of proof is on you to support all figures in your tax return and especially an amount that reduces your tax liability.
5. To be compliant as required by law.
6. For companies dealing with goods, record-keeping can help in times of conflict with the customer. For example, if the customer agreed to a contract or to pay a certain amount for certain goods and later tries to dispute.
7. When dealing with suppliers’ record-keeping is important to match goods ordered versus goods delivered and the prices.
8. Budgeting – Record keeping will help you budget for your next financial period.
9. Help in acquiring business deals – Some clients, e.g. the government, might require certain documentation concerning your business for them to onboard as a supplier.
10. Proper record-keeping comes in handy when acquiring a loan or during valuation to sell your business.

In conclusion proper record keeping can seem like a daunting task and even destruct you from your core work but once in a while (depending on your business transactions), create time to do some filing and write on your receipts/invoices the purpose of each, if not descriptive enough, as with time you might forget or outsource a bookkeeper/accountant to keep the records for you.

This will make work easier for you and even save you a couple of bucks. I cannot emphasize enough the importance of keeping your records while running your business. So, while we are at it, why don’t you go and work on that pile of receipts? Happy filing J

This article has been written by Alice Chege, a Finance Consultant at Zenuha, an independent advisory firm that offers outsourced Finance & Accounting services to entrepreneurs, small to medium-sized businesses, foundations, corporations, and high net worth individuals.

Contact Alice via consulting@zenuha.com.