Episode 24 – Paper and Digital: How to Archive Documents
Welcome, once again to another episode, this one, gearing up with filing and organization for the end of this year and the beginning of the next. I’m (still) Paul Rosenblum.
For tax purposes in the U.S., the IRS requires all of us to keep receipts in a readable form, and to document every financial transaction that happens within a company. If you notice, the banks have 7 years of bank statements readily available on the website when you log into your account, and the same with credit card statements. They don’t have graphics of checks that you wrote as far back as 7 years ago, so it’s up to you to keep them. This is because of how long the IRS has to audit your tax return from the time it was filed. 7 years. The tax returns themselves should be kept forever, but the actual receipts can be shredded or deleted after 7 full years. I have bankers’ boxes for 7 years of printed bank statements (as a bookkeeper, I do better data entry with paper statements rather than PDF documents), and other statements that clients send me and at the end of every year, Once a year, the shredders come in and shred the oldest year. There are also some parts of your personal taxes that need to be documented and archived such as bank interest and capital gains, among others.
Depending on how large a company that you run, you can either organize and save the original paper receipts or if there are too many to handle individually, or you can scan the receipts and then store them in a digital format. Today, let’s talk about both.
If you have a few pages of transactions on a bank statement or a credit card statement every month, you could keep the paper receipts and use a binder clip to attach all the receipts directly to the paper bank statement and then file it away by month and year. Have a separate folder for the bank statements versus the credit card statements.
These days, though, many people are saving receipts and bank statements in a digital form. Bank statements can be downloaded and saved as PDF files and stored on Dropbox, Google Drive, or on an external hard drive in your office or home office. There are cloud-based services that allow you to take a picture of a receipt at the time that you get it and upload it to the cloud to be stored – all through an easy-to-use app for your phone. There are several apps including Expensify and Concur (the two largest companies), and some smaller ones including Iqboxy (which is now ‘Travel Bank’). These run from around $10.00 per month and up, depending on the service and your needs.
When I first started my first job as a bookkeeper, I went through their files and noticed that they had no system at all. Even before I got any accounting training, I created a paper file system just by instinct alone. This is what I created – (and I hope that this will help you in creating your own system, even though it doesn’t have to be exactly what I did) –
Since 1994, computers were still pre-windows 95, so we printed out everything. Digital filing wasn’t thought about since the hard drives in those days were a total of 250 Megabytes (yes, MEG, not GIGS). I needed to be able to find things quickly, because even downloading a bank statement from a bank with the lack of internet speed back then was a chore, so I ordered some ‘Green Hanging Folders’ and a box of manilla folders to put inside of them.
I had one ‘Hanging Folder’ for each year of bank statements, and a folder inside of that hanging folder for each kind of bank statement – savings or checking. I very carefully labeled those, so I knew exactly where things were if I needed to find them quickly to look something up.
I then had two folders for accounts payable and two folders for accounts receivable. The first folder for A/P was made up of bills that were entered into the accounting system but were unpaid. The second folder was for bills that were paid. So, I’d move the bills from one folder into another folder after the weekly check runs and bills were paid. I bought a stamp that said “QB Entered” (QuickBooks entered) and I ‘d stamp each bill entered into the system right after I input them. In the folder they went. When I paid that bill, I’d then have another stamp that said “PAID” with a line that I could hand write a date that it was paid. Once the bill was paid, it would move from the Accounts Payable folder for unpaid bills to the folder for paid bills. Inside of that folder, I’d have manilla folders for each vendor so that the paid bills would be together and easy to find. At the end of the month when I knew the payments went through, I’d move the paid bills from the Accounts Payable folder to its permanent spot in folders that would be for each vendor to be kept for 7 years.
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Tedious, huh? It almost sounds like a full-time job just organizing the paperwork! But I was always fast and accurate, organized and focused so I got the accounts payable done in the morning and on to other things in the afternoon.
These days, however, there’s less paper actually printed out for business owners (maybe more printed out for some bookkeepers and accountants – but don’t worry, I purchase recycled paper and when it gets shredded, I always use a licensed shredding company that recycles the paper again).
However, for a business owner, digital filing works just as well. You can use an app to take a picture of all receipts (and your employees can use the same thing if they are spending the company’s money) and upload that image to the cloud and store the receipts there. (QuickBooks Online has a feature for that). They can always be printed out whenever needed. You can also very easily and quickly download bank statements, credit card statements, as well as loan and credit line statements into a PDF format and store them on your computer, Dropbox, Google Drive or an external hard drive, as mentioned earlier.
I’d first create a file folder for each year. Inside of that file folder, I’d create another folder for the bank that has your checking and savings account for the business. Then inside of that folder, create a folder for each separate bank account. I’d do the same routine with the credit card accounts, the loan accounts and credit line accounts. Even though these statements are online for 7 years on the bank’s website, what happens if you need these statements and the internet is down, or the website is having problems at your bank? It’s always good to have copies that are accessible without needing access to the internet. For audit purposes, the auditor will almost always ask (or your accountant who would represent you at the IRS office) will want to bring printed bank statements with them. So, downloading them in a PDF format and saving them might very well save time later.
On the Accounts Payable side, I’d create a folder for each vendor that you receive a bill from. I’m not including the vendors, such as restaurants, gas stations, or any other places that you spend money at, because in those cases you have receipts that you are saving separately. I’m only talking about vendors who email or send a bill to you to be paid later. If ever audited, they could ask you or your accountant for the actual bills from your vendors. I’d also run an Accounts Payable report once per month and save that as a PDF file and file that away as well within your file folder structure. If your accounting system crashes, and somehow your backup is corrupt, you should have the information available to you to reconstruct your accounting. I know, I think the worst, and hope for the best. I’m a BSB – a ‘Boy Scout Bookkeeper’ -- I’m always prepared!
On the Accounts Receivable side, I’d CC yourself with every customer invoice that you create in your system at the time you email your customer the invoice. Make a folder in your email to archive at the end of every year. Yes, the invoices are in your accounting system, but as a backup, you should have copies that don’t require your accounting system access. Run the Accounts Receivable report every month and drop that in a folder, as a backup.
Any letter from the IRS, you need to keep, even after it’s resolved, if you need to pay interest or a penalty. Notices from the IRS will have a tax year associated with it, so you’ll know which folder to save it to in your filing system. Any check that you receive from your state or the IRS should be saved by scanning or at the very least snapping a picture of it, because each IRS or State check have numbers on it which will tell the accountant exactly what that check represents. Any interest from the bank, or statements from your IRA or 401K or SEP – you need to keep. Capital gains statements, the same.
You can have any kind of system that you want to create – I’ve seen all kinds because people think differently about organizing -- However, if you can find documents pretty quickly and the organization makes sense to you, then that’s what counts.
I have had clients say to me -- “I don’t have time to keep receipts and organize all of this stuff – I’m trying to run a business here!”. Several years later, they got audited, and the auditor was asking for receipts, which the owner couldn’t produce, so tens of thousands of dollars of expenses were disallowed because the IRS was looking for receipts and not line items on a credit card statement. The reason to keep bank statements, for one example, is to prove who a Zelle was written to. If a Zelle payment is made to Sally Smith (on your bank statement) for $5,000.00, but your books say, ‘Sally Smith LLC’, or ‘Sally Smith Inc.’, the auditor will probably throw out that expense, claiming that you are paying a personal account, and not the LLC or corporate account directly. There are banks, Chase, for one example, where every month you can search for paper checks that were cashed and convert those check graphics to one pdf file per month and then store the actual check graphics in your folder system.
This, unfortunately, is just part of running a business. I don’t like things that I have to do running my own business -- but they just have to be done. Period. These are some of the issues that I sometimes have with some of my clients--- they don’t get W9 forms, they don’t keep receipts, they don’t keep documentation for possible audits, etc., etc., etc.
Also, keep any incoming 1099’s, as you could be asked for them as well during a possible audit. Save your outgoing 1099’s that you or your bookkeeper create in Jan. of every year for the prior year and for the last 7 years.
I’d also suggest that you don’t conduct business as usual through texts on a cell phone. Those would be tougher to piece together if needed later. There’s software that allows you to print text messages from your cell phone to a printer attached to your computer, so that you can file them and print them out if needed later. You can then make notes on the PDF file as to what text messages were for what contract, or whatever the case might be.
There are also special scanners that allow you to scan a bill from a vendor, for example, and the scanner will actually read the name of that vendor and create a folder automatically in your computer and organize things for you.
I have always organized the paper bank statements, from the beginning of the year on top, to the end of the year on the bottom. Many years ago, when I hired a data entry person to also do the filing, she suggested that we do the opposite -- that is – to have the current month at the top of that year’s bank statements and the beginning of the year on the bottom. Just the opposite of the way my mind works, but we tried it, and it actually ends up being more convenient, once I got used to it. So, old dogs CAN learn new tricks!
The end of the year is coming up, and I hope I have given you some ideas of how to organize the mound of paperwork your company accumulates, and if you’re a bookkeeper, I hope you have gotten some ideas here too.
Drop me a line and tell me how you organize paperwork for your business -- Inquiring minds like to know! Just click on the link under the description of this episode or go to my website and leave me a voicemail there.
Next episode – I’ll be talking about the updates on the 1099 situation – laws change as of Jan. 1, 2024.
The clocks ticking -- almost the end of the year for me! I’m (working feverishly and not taking enough breaks, and lunch? What’s that?) – I’m (working too hard at my age, or ANY age) -- Paul Rosenblum