Record Keeping

A suggested filing system

What you should bear in mind

The tax regulations require most businesses to keep their accounting records for up to six years from the end of the accounting period to which they relate.

It is certainly the case, that a visiting tax inspector will ask to see all the records, ledgers and related invoices for the last three complete years. More than a few individuals have found out how expensive it can be, if the visiting inspector is not satisfied with the standard of record keeping.

It is not only the tax inspector that may require to see such records. One day you may wish to sell your successful business. The buyer is obviously going to inspect your accounting records to confirm the sale price valuation. It is an obvious point to make, but if you can produce an accurate and complete set of records going back over several years, it will only serve to support a higher valuation. The lack of such records is often used to force the vendor back to the negotiating table.

The most important and final point to make, is that is very much to your own personal advantage to keep good accounting records. It can help you run your business more efficiently. Even the smallest of enterprises will benefit from the management information you can extract from the most basic of daybooks.

So, if we have provided the motivation for you to keep keep proper accounting records, it is worth spending a few moments of your time looking at our suggestions of how to physically store those records.

The stationery

We have had to work our way through thousands of clients' filing systems. We have concluded that you cannot improve upon the following approach. It is simple to create and just as easy to use. It is also surprisingly inexpensive. In fact, all you need are the following items:

A supply of good quality lever-arch files

A supply of 10-part, card file dividers

A quality hole punch

A quality stapler

A supply of gum-sticks (for sticking several small receipts on to one A4 sheet to reduce bulk)

You will need to set-up the following files. For smaller enterprises, where the number of transactions are measured in the hundreds, you may find you only need two or three files. You just section off your files, using dividers.

The system is fully scalable as the business gets larger. You just need more files to cope with the volume of sales invoices you raise, and suppliers' invoices you receive.

File	Name	Description
1	Unpaid sales invoices	Temporary store for unpaid sales invoices, in reference order number.
2	Paid sales invoices	Permanent store for paid sales invoices, in reference order number.
3	Till roll takings	For till roll takings reconciliation sheets, together with the related till rolls.
4	Unpaid PDB invoices	Temporary store for unpaid suppliers' invoices, in reference order number.
5	Paid PDB invoices	Permanent store for paid suppliers' invoices, in reference order number.
6	Bank statements	To store bank statements, and written records of bank statement reconciliation.
7	Petty cash	For records of cash transactions and non-PDB suppliers' receipts/invoices.
8	Credit cards	To store credit card statements and non-PDB suppliers' invoices.
9	VAT returns	To store copies of each VAT100 return, together with supporting documentation.
10	Payroll	To store payroll working schedules, together with annual returns, etc.
11	Staff expenses	For records of reimbursements of staff expenses forms, with supporting receipts.
12	Inland Revenue	For correspondence with the Inland Revenue, tax computations, etc.
13	Fixed assets	For details of fixed asset acquisitions and disposals, together with copies of invoices.
14	Statutory	For documentation relating to the formation and administration of the company's affairs.

Are lever-arch files really necessary?

We would strongly recommend you stick to lever-arch files, and avoid the cheaper option of fixed-clip folders. The latter are not so durable, which is an important consideration when you remember you are going to have to keep these records for six years.

Another practical point in favour of lever-arch files, is that you can easily extract and replace a single document if necessary. If you use fixed-clip files, you can guarantee that the document you want, will be at the back.

We would strongly recommend you never store small receipts, loose in large envelopes. Tax inspectors or accountants always pick the biggest envelopes, and then ask you to reconcile the contents to the figures in the books. It is bad enough having to repeat such a mundane task twice. It gets worse when you find you can't reconcile the two, probably because receipts have been lost. A much better approach is to use a gum-stick to stick small receipts to scrap A4 paper. It may take a little more time, but it reduces file bulk and maintains the all-important paper audit trail.

How should you file your sales and supplier invoices?

Most businesses seem to automatically file their own sales invoices in reference number order. It is in trying to decide whether to file suppliers' invoices in alphabetical or reference number order, that things can become a little more interesting and heated.

Many an argument has arisen over the way it should be done. So the first point to make, is that the final choice should be given to those that need to access the files the most. If the consensus favours alphabetical filing, then we would defer to their choice. But we state for the record, that we would prefer to see files arranged in document reference order.

Before stating the reasons for our choice, we of course have to deal with the problem of what reference you are going to use, if you do decide to store purchase invoices in numerical order.

Unlike sales, where your accounting system generates a sequential sales invoice number for each document raised, your suppliers' invoices will arrive without a similar unique identifying tag. You will need such a tag, so that you can maintain the paper audit trail.

To get around the problem, all you do is give each supplier's invoice your own unique reference - we refer to this as the IPIR Number (Internal PDB Invoice Reference number).It might take the form P001, P002, P003 etc.

As each supplier's invoice is received, it should be assigned the next available IPIR number. To be written in the top, right-hand corner of the document, so it is readily visible once stored in the file.

Some authorities recommend that this should be done at the point you open the post, so that all potential liabilities are recorded in the accounting system. We would suggest, however, that it is more appropriate to assign the IPIR number after the purchase invoice has been approved. Just in case you wish to dispute it.

Having now suggested a method of assigning a unique IPIR number, here are the reasons why filing suppliers' invoices in sequential number order is more advantageous than alphabetical:

It creates the simplest filing system for finding documents quickly. This is because you only need one piece of information (the IPIR number) to locate it. In an alphabetical system you need both the name and the unique identifier to start your search. Another complication arises, when people apply different methods of selecting the letter to file the document under. You may feel that "S" or perhaps "J" would seem reasonable for "Mr James Smith", but you can just see the office temp filing it under "M" for "Mr".

If every document has a different IPIR number, then it follows that every document has a unique place in the filing system. If a document is temporarily removed from a file, then the IPIR number can be used to ensure that it is returned to its original position. People tend to be more lackadaisical about replacing documents in alphabetical systems. The nearest place will do. Does it matter? The honest answer is 'No', until you are charged with finding the missing item!

If documents are stored in number order, a quick review of the sequence will immediately establish if you are looking at a complete set of records. Any gaps in the sequence, will immediately tell the reviewer the exact number of items that may be missing. This sequence test is frequently used by internal managers, auditors and visiting tax inspectors for a variety of reasons. It is just not possible to carry out the same sequence check, if the documents are stored alphabetically.

Storing documents in reference number order, will also create a filing system that reflects the passage of time. It will be possible for anyone to pick up a file and review all of the documents that were recognised, or generated, in the accounting system at about the same time. Once again it is not possible to do this if the documents are filed alphabetically.

So are there any disadvantages to filing in numerical order? Advocates of the alphabetical method, are always quick to point out the convenience of having all of the relevant documents for a particular supplier (or customer) in just one place. There is just one flaw in this argument. There is no physical way of checking that all the documents really are there. And besides, a few clicks of a mouse in any accounting system, would give you the complete information in a much more useful format.

We have labored the point of numerical order filing because it is so important. You need to keep your accounting records for up to six years, and that includes keeping the paper audit trail intact and working for the same period.

Filing in numerical order sequence will give you the best chance of avoiding problems in the future.