Monthly Bookkeeping: Understanding a Small Business Record Review

Statements and receipts answer different questions

A statement shows what moved through an account. An invoice or receipt provides detail about the underlying transaction. The IRS identifies sales slips, bills, invoices, receipts, and other documents as support for business books. Electronic records still need to meet the applicable recordkeeping principles.

Sources: IRS: What kind of records should I keep?

What reconciliation means

Reconciliation is the comparison of the accounting record with an account statement, including identification of differences. Timing, outstanding transactions, or missing entries may explain a difference. A match is useful, but it does not independently establish that every transaction has the right business purpose or tax classification.

Sources: IRS: Publication 583, recordkeeping and reconciliation

An illustrative monthly review sequence

A process can be described without prescribing a tax treatment. For example, a review log might show the following stages and the unresolved items at each stage.

• Account statements collected for the same reporting period.
• Transactions linked to available invoices and receipts.
• Differences between statements and accounting records identified.
• Unclear items recorded as questions rather than guessed classifications.
• Reports labeled with their period and review status.

Reports show a different view from cash

A profit and loss report summarizes income and expenses for a period. A balance sheet shows assets, liabilities, and equity at a point in time. For example, moving cash between two business accounts does not, by itself, create a new customer sale. A report's usefulness depends on the information and accounting method behind it. Draft and reviewed versions can tell different stories when records are incomplete.

Sources: IRS: Publication 583, recordkeeping and reconciliation