Usually, getting something brand spanking new and shiny fills us with optimism and hope that the new thing will make our lives easier in terms of beauty, ease, function or all three. This is true whether it is something for your everyday personal life or the new upgraded accounting software that will help your business grow exponentially (you hope). But while you are buying the latest and greatest accounting software, don’t forget the things all accounting software need in case of an audit.
Before we talk about software, I must talk about invoicing. Source documents are the most important things in an audit. Your invoices must clearly state what was sold, who the items or services were sold to, where the items were shipped, and where the service was performed. Without these invoice basics, your audit will be difficult regardless of your accounting software.
Let’s assume that your invoices have all the information that I mentioned above. And your accounting staff inputs all pertinent fields into your accounting system. The next step is making sure your accounting software adequately addresses your sales and use tax needs.
Every taxing jurisdiction wants the same thing. Their focus is to verify that you are charging and remitting the appropriate sales and use tax. In order to accomplish that, they must know (1) what was sold, (2) the taxability of the items sold, (3) whether or not the sale is reportable in their jurisdiction, and (4) which sales are tax-free sales.
Determining what is sold is usually relatively simple, especially if your invoices and general ledger coding is clear. The taxability of the items sold can be more complex. But before you even get to taxability, an auditor will want to know if the sales are reportable in their jurisdiction. A Texas auditor is not interested in your Oklahoma or Louisiana sales. An auditor for the state of California is not interested in your overseas sales. If your accounting software cannot segregate out-of-state sales or tax-exempt sales, how will the auditor know which sales to review and which to ignore?
Some business owners decide that they can account for sales and use tax without using a software package or module. Depending on the sophistication of your business, that may be a viable option. But I caution you to beware. Whether you have a high dollar accounting software or an EXCEL spreadsheet, the auditor’s expectations are the same. An EXCEL spreadsheet may work when preparing the sales and use tax return, but what happens when you erase the prior month’s information? Or you don’t print out the spreadsheet that was used to file your sales and use tax returns? Your business will be open to extra scrutiny from the taxing authority because there is no clear audit trail. Extra scrutiny from the taxing authority is about as pleasant as an appointment with the dentist.
The point is when you are thinking about accounting software, don’t forget what information you will need in case you are ever audited. Whether you buy the Cadillac or Yugo of software systems, the things that the taxing authority will want are pretty much the same for every jurisdiction. Make sure you can provide them in order to make your audit go smoother. Keep that in mind when you are making your software purchases.