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What Kind Of Record-Keeping System Must I Have?

Simply stated, the Tax Courts prescribed a standard for determining that a bookkeeping system is appropriate: “Does the bookkeeping provide sufficient data for the taxpayer to make informed business decisions”. An informed business decision is designed to increase profits, reduce losses, and evaluate the overall performance. Here is what the IRS says: You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records.

However, the business you are in affects the type of records you need to keep for federal tax purposes. Your record-keeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.