What business records
do I need to keep?
Most business owners understand what records they need to keep for tax purposes, and that documents, including copies of invoices for monies received and bills for monies paid, need to be kept for seven years. However you need to know much more about record keeping than this. Having good systems, and staying on top of things is essential to ensure you don’t lose important information.
Paper or digital copies?
Either original or digital copies of invoices and bills are acceptable, as long as all documents within a seven year period can be reproduced for Inland Revenue. If you're audited and don't have proof of things you've claimed, you can face penalties or legal action.
- Hard copy documents are fine, particularly in a simple business where you won’t need to store too many documents. We recommend using ring binders and saving your documents in date order, or something similar.
- Hard copy documents must be stored in a safe environment which protects them from deteriorating to the extent that they can’t be read.
- Digital format is best in a more advanced business, or if you use an accounting program. Scan and save the documents in a PDF format to folders on your computer’s hard-drive or on a USB stick. Alternatively, we can recommend an accounting program which allows you to attach the document to the relevant receipt or payment made.
- We recommend smaller businesses have a printer/scanner for scanning documents. One with a document feeder will be much easier to use. You can also use your phone to take photos, however these are not always as user friendly as PDFs.
Keep your bank accounts separate
Businesses must keep sufficient records so IRD can calculate income, expenses and GST. They must also be able to confirm accounts attached to any income tax returns. While this is a grey area which many business owners are not aware of, it’s just as important as keeping copies of invoices and bills.
- We highly recommend using a separate business bank account for all business transactions. This means that information is easily available to calculate all income and expenses as required.
- You’re required to keep bank statements for seven years. While hard copy statements are usually available online for that period, if you close your account or change banks, you’ll lose those records – make sure you save them beforehand.
- We strongly recommend you keep all personal transactions out of the business account. Use your personal account for personal transactions and business account for business transactions. Then do a weekly drawing from your business account into your personal account to cover personal expenses and savings.
- Drawings are not taxable earnings. Income tax is calculated on gross earnings after expenses, and not on the amount of drawings taken out of the business bank account.
- Think of drawings as an advance on taxable income. Once a financial year has ended, 31stMarch, we then work out how much the taxable income is. The difference between the taxable income and the drawings for the year, is the owner’s account. You will owe the difference to the business if your drawings are more than the taxable income or the business will owe you if your drawings are less than the taxable income.
Keep your electronic data safe
Most business owners keep their records on computer. This can include spreadsheets, emails, PDF documents, photos, productivity software, CRM software and apps. We firmly advise using a cloud-based accounting program. This helps satisfy all IRD's requirements for keeping your business records on a computer.
- Our preferred accounting program is Xero. It allows you to save digital copies of all your business documents, which complies with IRD’s document storage requirement. Xero’s capability in terms of document handling is being developed in leaps and bounds and will be a true game changer with record keeping for the future. Contact us to chat about using a Xero package for your business.
- We recommend Crystal Payroll as the accounting service provider for wages.
- It’s important to note that it’s the business owner’s responsibility to make sure the data being entered in an accounting program is correct.
What if I run my business through a company?
There are specific rules for companies, which creates some additional accounting requirements and makes it a more expensive way to run your business. For this reason it’s best, where suitable, to operate as a sole trader rather than a company. Contact us if you need advice on your options.