If you are a freelancer, keeping an account of expenses can be a laborious task. Due to your hectic schedule, you might find little time to consolidate your expenses and record your receipts in an orderly, timely manner.
However, it is during the tax season that your nightmare will unfold. You will find yourself working through a maze of receipts, which have incomplete details, to determine your business expenses. This could have very dangerous consequences, as your tax return could be in peril. The fact of the matter is that receipts have to be taken seriously as they serve as an audit protection.
Risk of unreported receipts
If you give second-hand treatment to receipt handling, you are likely to put your business in a precarious position. The careless act of losing receipts by not storing them in the right manner or failing to proactively update them as business expenses has tremendous implications.
Firstly, it invariably leads you to inaccurately underestimate the company expenses and inflate the revenue and profit figures.
In all likelihood, if the expenses are understated, you will tend to overspend and commit yourself to investments that the company cash flows cannot afford. You could land up in high bad debt. Cheque bouncing is one of the common incidents in this type of a scenario. This is also considered a criminal offence in some countries.
Secondly, you can be charged with fraud, and the reputation of your business can be at stake, if you unknowingly declare flawed revenue and profit figures to your stakeholders.
Lastly, you will have no choice but to pay a much higher tax as you will not have the ample receipts or documentation to prove that your expenses were business related.
Cardinal rules of receipt keeping
So what are the must-dos that business owners – like you – should keep in mind while handling your expense keeping?
First and foremost, you must keep all your work-related receipts. These can then be used as evidence for your business expenses during tax time.
However, it is not only about having all the receipts, but also ensuring that all the receipts have the requisite details to explain their purpose.
This comes handy for you, especially when you have to claim company expenses for entertainment and food. For instance, name of the employees or clients who were part of the event, the respective job titles, the date of the event and the venue should be recorded next to the receipts.
Secondly, you might have a credit card that is specifically assigned for business expenses. However, storing only credit-card statements will not be sufficient for your record keeping.
Since these statements are never itemised, all purchases will look like large lump sums. Hence, please ensure you have a register receipt to accompany your credit-card statements.
Thirdly, all of us know that the ink on the receipts fade away with time. Since most tax authorities expect business owners to have their company records for up to six years, it is best to scan your receipts or better still, take a photo.
Lastly, while credit-card and debit-card expenses get documented, pure cash transactions are far harder to track and can sometimes be forgotten and not accounted for. Hence, it is vital for you to get receipts from the vendor for every cash transaction.
Optimal management of receipts
Though receipts are very important, there is no denying that managing them is a painstaking process that requires piles of physical receipts, numerous spreadsheets and endless administrative time.
If you are working out in the field or are away on business travel, you might find it difficult to update your receipts on the company system, unless you are back in the office.
However, there are technology solutions in the market with online platforms to help you streamline your expenses. These solutions work seamlessly on any mobile device, which is a boon for people who are engaged in offsite work, or are out on business travel.
You can upload your receipts on the go, using tools such as QuickBooks Self-Employed, as and when you incur a business expense. These tools allow users to categorise their expenses, be it a small expense such as office supplies, mileage and meals, or big purchases such as extended international travel.
You can digitise your receipts in real time when you are inputting your expenses, thus relieving yourself of having to reconcile your receipts manually.
If you follow the fundamental requirements for receipt keeping, and use a technology platform to manage your receipts, then all it takes is a click of a button to accurately display your business expenses. Rather than a storm, the tax season will then be a pleasant breeze for you.