Accounting records are extremely important for any business, and most business owners do tend to keep records of their transactions. However, as transactions pile up, the question arises, just how long should a business keep their accounting records? This is a valid question pertaining to accounting records retention guidelines, but there is no single agreed-upon answer.
First, you must distinguish between accounting records and accounting data. Accounting data is what you enter into your books, and is used to create accounting reports.
Accounting records are where that data comes from. With every business transaction, there is a paper trail that provides evidence of the transaction: for example, invoices provide proof of a sale, and receipts provide proof of a purchase. These documents in general are called supporting documents. Collectively, your supporting documents and the books into which the data they provide are entered, are your accounting records.
Simply entering accounting data into the various accounts will not be sufficient for recordkeeping. In the event of a federal or state audit, auditors will require that you present the supporting documents as evidence of the transactions recorded in the books.
To answer the question of “how long you should keep accounting records,” the answer may be determined by what you intend to do with these records. In general, accounting records are useful in three major ways which determine the length of time you should keep them. Here are some relevant accounting records retention guidelines:
#1. For tax purposes
Occasionally, a review (also called the dreaded ‘audit’) of your old accounting paperwork may be required to provide evidence in the resolution of a tax issue. The IRS provides some guidelines which dictate how records should be stored:
- Generally, records should be kept for a minimum period of 3 years with the exception of employment tax records, which should be kept for 4 years from tax due date, or when a business actually paid their taxes, whichever is later.
- If you paid your taxes but subsequently decide to file a claim for credit or for a refund, you must keep your records for 3 years from the date on which you filed your original return or 2 years from the date you paid the tax, whichever is later.
- For a claim for loss due to worthless securities or bad debts, records must be kept for 7 years.
- Where you have unreported taxable income that is 25% more than the gross income actually reported, you must keep records for 6 years.
- If you do not file returns or have filed them fraudulently, records must be kept indefinitely. For obvious reasons, we do not recommend this option.
#2. Records connected to property
Records concerning any property you may have acquired will need to be kept to help you calculate important items such depreciation, amortization and depletion deduction. The IRS provides the following accounting records retention guidelines specific to property: “Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property.”
#3. Business analysis
Accounting data is helpful at providing insight into the business performance. However, once the data has been digitized or entered into reports, much of the paperwork is not needed for business analysis any longer.
If you intend to sell your business at some point however, potential buyers may be interested in seeing the supporting documents that provide evidence that the data entered into your books is accurate.
Other parties such as insurance companies may have individual accounting records retention guidelines for how long they would like you to keep your accounting records. For the sake of brevity, we will not cover those guidelines in this post.
#4. Day to day operations
You will need to keep accounting records to support day to day business functions such as billing. Without keeping accurate records, you may not be able to correctly identify accounts receivable or accounts payable which can affect business cash flow. While this does not fall under any accounting records retention guidelines, it is more of advised good practice guideline.
Main methods of recording transactions:
Manual
The manual method of record-keeping is typically associated with the traditional paper-based bookkeeping. When manual methods, records are kept in folders that group similar transactions that occur within a certain period of time. This folder is then usually stored in a cabinet, along with other folders.
Manual record keeping systems are straightforward and relatively cheap to get started with since all you will need will be a few folders and a cabinet to store them.
The disadvantages of using manual record keeping systems include greater chance of misfiling errors, which will force you to have to go through the entire cabinet to find what you are looking for and it simply requires the business owner to be more organized. Manual record keeping is also susceptible to mishaps such as fires and floods, which may easily destroy paper records.
Digital
Digital recordkeeping can be used alongside manual bookkeeping systems. Typically, you scan the manual records and save them on a computer or hard drive. This method is advantageous because it makes it very easy for you to access your files, as all you have to do is use the search function (almost every operating systems comes with this), to locate files easily.
With digital recordkeeping there is a higher cost associated, and although there is smaller risk of losing your data to random events such as a fire or flood, there are other risks, such as cyber-crime, that you have to consider. Digital methods may also take up a bit more time than you might find convenient, as they require that you scan relevant documents, which may sometimes comprise several pages.
Best Practices
Here are four best practices to go with the above mentioned accounting records retention guidelines:
- Use fire resistant and waterproof storage cabinets for your physical records.
- Make copies of all records and store them in different locations. If possible, keep both digital and physical copies of your records.
- Invest in cyber security. Get a decent anti-virus to protect your digital records.
- Use cloud software: Cloud software grants you access to a very high level of data protection such as encryption. In addition, using cloud software will make it very easy for you to access your data from multiple devices, and from remote locations.