By: Michael Scott Ioane
Keeping records is always important. It is what real businesses do to keep track of all its transactions and monitor its own activity. You may be thinking that documentation exposes you to more scrutiny. Well, just keep in mind that you may have no choice at some point but to be the target of such scrutiny. It is possible that you must deal with an IRS audit.
As record keeping is something you must do anyway, turn it to your advantage by using it to play part of your defense. The biggest problem for asset protection plans is to be found fraudulent. You can avoid this by documenting your transactions to demonstrate transparency.
First, you must decide on an accounting method. The cash method allows you to report revenue in the year that money comes in and report expenses in the same year the money was spent. The accrual method allows you to record revenue the moment you earned the profit, not necessarily when the money came in, and to record expenses in the year they were incurred, which is also not the same as when money actually changed hands. The cash method is much simpler and lets you see the actual cash flow. The accrual method is more difficult to use but provides a better overview of what your business is actually worth.
If you bought office equipment for $10,000 and you pay for them by installment for 2 years, the cash method will show you how much you are paying monthly. You see the actual flow of money. However, it does not clearly show you that you have incurred $10,000 in debt – something that the accrual method shows you right away. So, the cash method lets you see money changing hands but the accrual method gives you a better idea of where you really stand.
To avoid being declared fraudulent, keep documents to prove the authenticity of your transactions. Whether you pay for something or receive payment for anything, that activity would generate documents like receipts, invoices and deposit slips. Keep this in an organized manner so that you can easily produce them when asked.
Do not get confused with what your transactions represent. Purchases are items you bought to be able to produce something to sell. Expenses represent the cost of running your business aside from purchases. This includes equipment or bills. Petty cash is an amount of money, a “petty” amount, for everyday expenses. Keeping petty cash is not recommended as this complicates documentation.
There are many other things you should learn and decide upon concerning documentation. You need to think about whether you will use traditional paper and pen record keeping or computerized solutions. You have to decide between a single-entry and double-entry system. That is a discussion worth several more pages and this is what you would find in the “Asset Protection Manual” by Michael S. Ioane available from this site.
Start documenting for protection today. It would be a very wise thing to do.
Michael Scott Ioane