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The Importance of a Bookkeeping Audit Trail

3 of 11 in Series: The Essentials of Keeping Your Business Accounts

Good business bookkeeping systems leave good audit trails. An audit trail is a sequence of events leading up to a bookkeeping entry in your business's accounts. You start with the source documents and follow through the bookkeeping steps in recording transactions to reconstruct this path. You may need to go back to the source documents and either verify certain information in the accounts or reconstruct the information in a different manner.

Suppose that a salesperson is claiming some suspicious-looking travel expenses; you probably want to go through all that person’s travel and entertainment reimbursements for the past year.

If the IRS comes in for a field audit of your business, you’d better have good audit trails to substantiate all your expense deductions and sales revenue for the year. The IRS has rules about saving source documents for a reasonable period of time and having a well-defined process for making bookkeeping entries and keeping accounts:

  • Think twice before throwing away source documents too soon.

  • Check your audit trails for key transactions, such as cash collections, sales, cash disbursements, and inventory purchases.

Even computer-based accounting systems recognize the importance of audit trails. Well-designed computer programs provide the ability to backtrack through the sequence of steps involved in recording specific transactions.

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The Essentials of Keeping Your Business Accounts

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