Creating a file structure for accounting is critical for the overall success of the business. If properly structured, data retrieval and information access add to the overall value of the company. This article teaches the new business owner how to create a file structure to use with accounting.
The primary goal of creating a file structure is to make data retrieval easy and understandable by just about anyone involved in office operations. Keep in mind that the end user is how the structure is developed. From a simple format to a more complicated structure incorporating the entire office, the file structure should be organized in a systematic approach. First, break down the accounting function into the respective areas of importance. Next, subdivide these areas by accounting cycles. Finally, incorporate the accounting software function and the overall office to end up with a well-organized file structure for the company.
Accounting has 10 basic areas of continuous contribution. They are as follows:
- Financial Reporting
- Legal Matters
- Data File Backups
- Project Work
- Fixed Assets
So a file structure begins with ‘Accounting’ and then the 10 folders identified above. Now each folder is an area of accounting practice that will have sub-folders. The primary label for a sub-folder is the traditional accounting cycle, for 99% of all small businesses; this is a calendar year sub-folder. So, as an example Banking and Receivables are illustrated below:
It is important to use the calendar year or accounting year as a section in each of the main folders. First off, reporting is done in this format. Most interacting government agencies operate this way, Certified Public Accountants function on a calendar year; taxes are reported on an annual basis too. Even banks prepare the account statements on a monthly basis. So by organizing in this format, it makes it easy to retrieve the data. Now each year should be divided into the twelve calendar months. Inside the monthly folder sits the respective functions of that group. So for banking it would look like this:
For banking, data consists of daily bank reconciliations, monthly bank statements and notices from the bank about returned checks, interest earned etc. You should also have pdf files of the deposits you make along with the checks for that deposit. You should have a pdf of every document inside the data folder related to that account to that month.
Each of the main areas of accounting is organized based on the fundamental principle outlined above. However, each has some nuances involved. The sections below identify the respective issues and how to address them for each of the main areas:
For most businesses, there are generally a few customers that make up the bulk of money owed on regular basis to the business. So under the year folder, I would include the monthly folders and inside of those folders would be the regular reporting and collection activities. Reports include the monthly aging, receipts ledger, pdf files of checks received. This sub-folder should have the items related to receivables as a whole.
In addition to the monthly folder, have a folder for any customer that exceeds 5% of the revenue. In this customer folder should be all invoices, checks received and communications with that customer. If a phone call or e-mail is used to communicate, save it to this folder. Use OneNote software, Sticky Notes, or even WordPad to record your notes when communicating with the customer. These folks are your primary source of revenue and I can assure you, the more details you keep on them, the more impressed they will be; organization actually increases loyalty.
Similar to receivables, monthly folders with similar information related to payables. Include the check registers, accounts payable aging reports, vendor ledger runs etc. For those vendors that provide more than 5% of your products/services, keep a separate folder on them inside of that calendar year folder. Inside of that vendor folder keep copies of their bills, their vendor ledger for each month, pdf files on their statements to you and copies of your checks to them. Again, maintain records of your communication with the vendor inside of that vendor’s folder for that year.
Inside the calendar year folder should be sub-folders related to time sheets received, copies of paychecks prepared, the payroll summary per payroll etc. Do this by the month. In addition to monthly folders, include a folder for each quarter and in this folder place copies of your tax deposits, payroll quarterly reports and any governmental agency notices based on that quarter. Locate the notice based on the quarter the notice refers. It is important to track the tax deposits inside the respective quarter. In addition, inside the calendar year folder include another folder for the payroll Annual Reports. In this folder go the copies of W-2’s, W-3, Form 940 and any annual reconciliation reports you use. In addition, you should keep a copy of your benefits spreadsheets, vacation and personal time off sheets etc.
It is not a good idea to keep the personnel records here. Those should be stored in the human resources directory.
In this folder, calendar years are created. Inside the calendar year folder are monthly and quarterly folders depending on the accounting cycle. For most small businesses, a monthly cycle is used. Inside this folder should go pdf’s of the respective accounting reports. Include summary receivables, payables, payroll; income and expenses, balance sheet, and production reports. You may desire to include sales reports and associated analysis. It is important to include production based information to augment the accounting reports. Production reports clarify the sourcing of revenues and costs associated with those revenues.
Legal & Taxes
Legal has some minor nuances. You still use the calendar year folder system. Inside this folder go the annual license renewals, board minutes and corporate annual reports. Include tax returns and distribution or dividend payments to shareholders.
In the master legal and taxes folder keep copies of all lease documents in a sub-folder labeled Leases and Contracts. Store your copies of the contracts with vendors and the landlord. If you receive notices associated with a particular contract, store them here too.
If any type of court case or legal matter unfolds, create a separate folder inside the Legal and Taxes folder and keep track of all communications and information related to that issue inside its respective folder.
Data System Backups
Store the accounting software backups in this main folder using the same year/calendar month system as above. If you have a lot of transaction activity, delete older files on a regular basis. Keep at least one data file per calendar month, usually the last day of the month.
Similar storage, however, the initial sub-folders may be project based and not calendar year based. This is really beneficial to construction contractors or organizations providing extended service agreements with certain customers. Store the respective documents, progress reports etc inside this sub-folder based on the calendar year. This way, any transaction activity in a follow up year can be stored in that calendar folder. It allows for clear understanding of connecting the time frame of accounting to the project progress.
In addition, any retail reporting or production reporting for product groupings or departments can be located in this directory. Use the terminology of your industry to organize this folder. Sometimes it is better to use product lines or brands as the folder system and not calendar based organization. Use what you feel is appropriate.
Organized in a similar calendar basis format as most of the other directories, store the purchase agreements, purchase receipts, warranties and installation receipts in the respective month of installation. At the end of the year, load copies of your fixed assets schedules, depreciation schedules, tax depreciation schedules, and the local government property tax schedules.
It is not uncommon to have a local government audit conducted on fixed assets. Load those documents here too. Include copies of your personal property tax statements and checks/receipts for tax payments.
For vehicles, I would create a sub-folder within ‘Fixed Assets’, not within the calendar cycles, for each vehicle/truck in your company. In this folder are calendar sub-folders. All license renewals, purchase agreements, repair and maintenance tickets and the like are kept here. This way, you can track each vehicle’s respective issues easily.
This folder is your catch all folder. Use the calendar year sub-folder system. Most items I’ve seen go into this folder include rare accounting events. This could be software items, audit issues, or one-time accounting events. Examples include accidents, or a sale of a division; or termination of a brand or product line. Use the industry terminology associated with your business for these particular items. One of my clients is a flooring outlet; he filed his franchise agreement documentation and negotiations in this folder.
Accounting is then a sub-folder of the company’s master folder. In addition to accounting, you will have human resources management, operations, and a resources directory. There should also be a directory to store company specific software programs and another directory for the databases associated with the respective software. You may have others including marketing, product or services section that contains brochures, information pamphlets etc. Organize the company in a format that is easy to understand and find information as you need. The above illustrates an appropriate filing structure for accounting. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you.