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In a financial transaction, it’s all about the paper trail. 

As a small business owner, whenever you conduct a transaction—even something minor like purchasing a box of pens for your business—the receipt for that transaction and any supporting documentation become what’s known as source documents. Those original documents, in turn, become an essential piece of the paper trail your accountant follows to create accurate tax returns and other types of financial reporting for your business. 

If you’d like to understand the importance of a paper trail for a business owner, this quick primer is for you. And if your accountant or bookkeeper’s smile turns the slightest bit strained when you tell them you don’t have documentation for all your transactions, you should definitely start reading. Right now.

Why are source documents so important?

Source documents detail the basic facts of a transaction—amount, date, payee and purpose. Without this information to back up your business transactions, your accountant doesn’t have the full financial picture needed to prove that you earned every bit of your tax refund or qualify for a small business loan. It’s your financial team’s job to be sure anything you report to the government and other institutions is thoroughly backed up by proof—especially in the case of a tax audit, when your transaction trails must be impeccably documented.

What kinds of source documents should I be keeping?

 Common source documents include:

• Proof of both purchases and expenses, such as:

  • Cash register receipts

  • Credit card receipts

  • Electronic receipts for online purchases

  • Receipts for travel, transportation, entertainment and gift expenses (this includes receipts turned in by your employees for expense reimbursement)

• Purchase and sales invoices

• Credit documentation for customer refunds

• Receipt books and cash register tapes (for proof of cash sales)

• Bank and credit card statements

• Canceled checks and check registers

• Deposit information for cash and credit sales

• Employee time cards

• Payroll reports

• Employment tax records

• Leases and contracts

• Evidence of sale or disposal of asset(s)

• Sales tax returns

Do I need to store the originals, or can I make digital copies?

It depends. Once the information has been recorded in the appropriate accounting journal (which should be done as soon after the transaction as possible), the source documents should be filed away where they can be easily retrieved if needed. Some accountants prefer to manage the documents for their clients, which can be easily (and digitally) done via the online portal you use to communicate with the firm. That way, your financial team has all the information they need stored securely in the cloud, available at a click. It also ensures they are ready to provide you with more meaningful insights into your business at any time.

If you prefer managing, storing, photocopying or digitizing the originals yourself, you should still check with your accountant or bookkeeper to be sure any copies meet the information and legibility standards of any agencies that may need to see them.

How long do I need to keep all these documents?

Regulations on document retention vary. In general, the IRS recommends saving financial records that are necessary for tax filing and potential audits for up to seven years. Some documents should be saved longer than others, as this IRS schedule shows:

• Financial records should be kept for three to six years.

• Employment tax records should be kept for at least four years after the tax is due or paid.

• If you forgot or neglected to file a tax return (which will hopefully never happen because it’s illegal not to file and pay taxes), keep your financial records indefinitely.

• Permits to operate your business, current lease agreements and stock certificates should be kept indefinitely.

 We know we’ve already said this, but your financial team can be your best friend in this very important aspect of owning a business. If you’d like to be sure your source documents are where they need to be, just complete the online contact form or give us a call. We’re here to help!