As an individual who pays income taxes, you probably don’t keep a lot of records. You might not keep any. Maybe you just have a W-2 from your regular job and you take a standard deduction on your 1040. So you’re not used to keeping records.

But when you’re in business, you have to keep records to show the results of your operations. There’s no outside party to tell you how much your business earned during the year.

There are two main reasons you need to have good records.

1. So you can prepare accurate tax returns
2. So you can prove your income and expenses

Just remember, it won’t matter how well you understand which business deductions you can take and how to calculate them, if you don’t have the records to prove them.

Some of the things you’ll need to keep records on include:

1. Your sales and any discounts you give
2. Returns and allowances
3. Amount of sales tax collected
4. Your purchases of business supplies
5. The cost of any products you buy for resale
6. The cost of furniture, computers, and equipment you buy for your business
7. Documentation for any business meals and entertainment
8. Mileage logs for any vehicles used in your business

Keeping good records is the best way to pay the least amount of tax possible.

Another reason that good record keeping is important is that you might have to give financial information to your bank to get a business loan or to refinance the mortgage on your house.

Keeping good records will give you the financial information you need to make good decisions in running your business.

You’ll be able to tell

1. Whether you’re making a profit
2. Which products and services are most profitable
3. Who your best customers are
4. Whether you can afford new equipment
5. How successful your marketing campaigns are

If you keep inventory in your business (as a direct seller for Mary Kay or similar companies, in your brick and mortar storefront, or an eBay or other online retail operation), keeping accurate records is an absolute necessity. You’ll need the details of your purchases (both costs and dates) in order to calculate your cost of goods sold. This is probably the most important number to keep track of as it’s usually your biggest expense relating to product sales.

You’ll also need to make sure you can identify any items that you withdraw for personal use.

Whether or not you have inventory, you’ll have to keep track of any cash or other property that you take out of the business.

Keeping your business and personal records completely separate is always a good idea and it becomes critical if you operate as a one person LLC or corporation.