Investing: Accounting and Tracking are just as critical.

In an earlier posting we saw that Goals should be SMART. T stands for tracking. If you have goals it is necessary for you to track whether you are on the correct path. If you were climbing a mountain and following a map, you would look for landmarks to ensure that you are on the correct path, will you not?

In exactly the same fashion if you are a serious player in the wealth creation business, we must be particular about the record keeping of your income, expenses, investments, taxation, etc.

Record keeping is necessary (nay, compulsory) for 3 main purposes:

  1. Tax returns filing
  2. Investment performance tracking
  3. Goals monitoring

All the 3 are critical and let us start in the same sequence as mentioned above.

You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing (pun intended!) experience.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IT department select your return for examination (in official lingo called scrutiny). Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, share transactions, and business or rental property — should be kept longer.

In most cases, the IT department does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your tax return:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs for those claiming reimbursement of car expenses from the employer

Investment records – those which have helped you claim the deductions
• Cancelled, imaged, cheques or any other proof of payment

• Any other records to support deductions or credits you claim on your return.

Good record-keeping throughout the year saves you time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will assist the preparer in quickly and accurately completing your return.

Nothing lasts forever, but you wouldn’t believe it by looking at some people’s record-keeping systems. People insist on keeping every scrap of paper, just in case. And when it comes to tax paperwork, folks are even more adamant. These documents will save me, they argue, if the IT department comes visiting.

But that’s not necessarily the case, say tax and organizational experts.

When it comes to tax-related documents, you should keep those that help you identify sources of income, keep track of expenses, determine the value of property, prepare tax returns or support claims made on those returns. However, common sense — as well as storage space — should be your guide.

The rule of thumb for tax papers is hold onto them until the chance of audit passes. Usually, this is three years after filing. But if the department suspects you underreported your income, it gets seven years to check into your tax life.

That’s why most accountants advise taxpayers, even those who are meticulous filers, to keep tax documents for six to 10 years.

Some items, however, have a longer shelf life. These generally are assets that a taxpayer will eventually sell, triggering a tax bill. So if you have a pension plan, an endowment plan, own a home or invest in the share market, tax pros recommend keeping these records indefinitely.

For most taxpayers, the biggest asset — and potential tax bill — is a home.

While the rules for home sales have changed in recent years, meaning sale profits don’t automatically face Capital Gains, any paperwork relating to a residence should be kept for as long as the home is owned. Inherited homes, homes broken down and reconstructed, etc. are all potential areas of tax confusion and should be taken care of.

Fast on the heels of home sales as tax triggers (and record-keeping headaches) are share transactions.

“A decade years ago, it was harder for people to invest so a lot were more conservative and went to a bank for a fixed deposit,” says Rohit Mehta a stock broker. “But with online trading, people are investing more. Keeping track of a FD or PPF wasn’t that difficult, but when you move on to shares, the tax record keeping becomes critical.”

Investment account statements contain financial data that a taxpayer will need as long as the share or mutual fund is owned. On the share side, there may be splits (bonus, rights, change in face value) that change the value of the holding and, therefore, the eventual worth of the share, which is used to determine the taxable cost.

Retirement record requirements

And then there are all those retirement savings plans, with all those different rules.

Contributions to PPF are tax free. But pension plans are tax-deferred. But sometimes already-taxed money goes into these accounts, too.

Business considerations
If you operate a small business, from a moonlighting job to a small operation with several employees, dealing with records becomes a bit more complex.

The Income Tax generally focuses on self-employed travel and entertainment expenses, scrutinizing returns to make sure all the expenses are really related to the business and can be proven. In these cases, complete and accurate — but not overdone — contemporaneous records need to be kept until the audit threshold passes.

Unlike personal bank statements, business financial account records should be kept permanently. Similarly, anyone who has employees should hang onto employment information and related tax returns for as long as the business is running. And don’t shred articles of incorporation, company bylaws, shareholder minutes, and trademark and copyright applications.

Pick a system, any system
Once you’ve identified critical records, the next step is to decide how to keep the data. Electronic bill paying can help keep track of your financial and tax life, but so can a plain old check register, as long as expenditures are entered faithfully. Do you need the computer and the world wide web to do it? Yes and a no. For repetitive, boring and accurate work the computer is a far better ally. The human mind it horrible in record keeping. Try calculating how much you spent on food in the past one month. Software programs (with faithful data entry work) can do a far, far better job.

It doesn’t matter if it’s a filing cabinet, cardboard boxes or a complex computer program. The key, is to find your record keeping comfort level, pick a system and stick with it. Myiris plus is a convenient way of aggregating your financial life and keeping it organized. It helps you know exactly what your net-worth is, when your bills are due, how much of cash you withdrew in the past 43 days, how your mutual funds are faring, which income tax form to use while filing your return, etc., etc. Ranjan Verma was also working on an accounting system – I have no clue on what stage that is now. Surely other financial practitioners also must be having some system which works…check them out too. 

Once you start down the path to investing, one thing that you’ll notice is that the paperwork piles up fast. You’ll get a confirmation every time you buy or sell a share or mutual fund, and every time you move money into or out of an account. And each of those account statements will probably include a couple of transactions, such as dividends you’re received or interest that’s been credited to your account.

If you invest using dividend reinvestment plans, or SIP (Systematic investment plans) you’ll have another set of statements to deal with, for each SIP and for each transaction. Every time you buy a mutual fund, you’ll receive a statement in the mail. Shares you own will send you quarterly and annual reports.

The bottom line: You’ll be swimming in paper if you don’t get organized. Besides the advantage of keeping your desk or dining room table clutter-free, myiris plus (www.m3.myirisplus.com) provides two some other important benefits:

Your CA will have all the up-to-date details in one location.

In case of you are physically (or mentally) disabled (or dead) the next person will find all the details in a well organized manner.

You’ll be better equipped to know how much of your investing profits you’ll owe to the tax, and can make better decisions regarding the tax implications of any investment decision. Tax planning (which happens much before tax filing)

You’ll be better equipped to figure out how well your portfolio has been performing and what problem areas you might need to address.

The biggest advantage of myiris plus to me comes from GOALS tracking. Most of us earn money to spend – on our selves, our families or charities. If this is so all the monies are earned towards meeting some goal. Goal tracking means checking whether your investments that you made towards a particular goal are going on track. Myiris plus, going forward will help you set milestones and check whether the direction and speed of your investments are appropriate of whether it requires any change – in the direction or the speed. This to me is the biggest advantage of record keeping – it helps your Track your goals.

After all Tracking is the last word in being SMART!

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8 Responses to “Investing: Accounting and Tracking are just as critical.”

  1. How value depleting is this activity of being a paraonoid collector of bills and expense reports just in case the thugs at IT come visiting. I guess,it might be cheaper,on the whole,to buy them off with a bribe.honestly,opportunity costs wise -just my rant,not advise!

  2. Pravin’s observation is not true in all cases.

    In any situation there are some minimum documents that are to be shown to stress ones point. I would like to offer a personal example. For some reason ITO called for reassessment of my ITR for 2004-05.

    As i could not find the same, i told him that i donto have the ITR acknowledgement. Then he sent me a notice taxing all the income other than TDS which worked out to be a big sum. I searched and thankfully i got a copy of the acknoledgement and could show him which helped in my favour.

  3. the ITR acknowledgment is something you HAVE to keep,isnt it..it is the thru-the-year bill-collecting that is the hassle

  4. Srinivas

    first of all the last line of Pravin says ‘it is a rant’ so lets leave it at that. The reason why I am replying is accounting is useful for YOU. Forget that the ITO wants or needs it. That is incidental. You should know what returns you are getting, why you invested (goal), etc. So keep records in such a way that you can generate MIS for yourself. In many cases, i have demolished the myth that they are getting good returns on their investments..

  5. Yeh, I share my experience. I had kept record of all mutual funds I invested 3 years before. But the tracking was not done. Today I observed that the funds are not doing well now and I have to sell or switch them to stop loss further.
    Record keeping and tracking is very much important. But I do not know whether I should declare, in tax return, the amount of sale which is more than 2 lakh or include switched (sale one scheme and purchase other scheme of same fund) amount also.

  6. Glad to see you are re-using content from the web…it saves time thats for sure.

    http://www.bankrate.com/finance/money-guides/tax-record-keeping-tips8-114874-1.aspx

  7. interesting. Mine was first published in a book for ‘myirisplus’ – an accounting software used personal finance…then it got edited in 2009 (i think)…

  8. Now I have decided to review investment every quarter, note down review details till year end and then decide POA (Plan Of Action)
    based on facts and expert advice. I think use of accounting software
    “myirisplus” may help in case of too many entries and complicated calculations. I dont know.

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