Importance of Documentation in Accounting

Why great accountants love this question (and mediocre ones avoid it) When you look at your accounting books' general ledger, you'll find various adjustments (often labeled as "true-up revenue" or simply "adjustments" in most accounting software). Without supporting documentation, it's almost impossible to determine why these adjustments were made. Best practice requires each adjustment to have: - A detailed memo explaining the reason - Clear documentation of assumptions made - Supporting files or documentation attached However, in small and medium-sized businesses, this practice is rarely followed. If your accountant consistently provides this documentation, they're among the top 1% of performers in their field. This insight gives you a quick way to evaluate your accountant's professionalism and attention to detail. The presence or absence of proper adjustment documentation can tell you everything you need to know about their work quality.

Accountants need to do a better job of managing and collecting source documents. It happens far too often - we crack open the books of a growing company, only to find out that their previous accountant was merely categorizing cash transactions directly to the P&L without any documentation or attribution to the underlying bills, invoices, or contracts. Sure, I'd expect that from a productized solution that's primarily focused on bank categorizations and not the true accounting. The problem is that as a company continues to grow, the source documents become tremendously important for quality accounting, compliance requirements, and potential exit opportunities. I wouldn't expect this for 100% of transactions, considering materiality, but it becomes far more difficult to track accurate accounting without the supporting documentation. Accountants need to ensure there is a quality process for this. #accounting

I tell people frequently that recordkeeping is the number one place to start in terms of tax strategy. Not the ending point, but definitely the starting point. Thomas Langlois, took his case to Tax Court after the IRS determined he owed nearly $28,000 in additional taxes, plus penalties. He had claimed deductions for unreimbursed employee business expenses (back in 2015 when that was still allowed) and partnership losses, but failed to provide sufficient records to back them up. The court sided with the IRS, emphasizing that taxpayers must keep proper documentation to support their deductions. This case serves as a reminder that without clear records, tax deductions can be denied (even if legitimate), leading to costly consequences. Langlois v. Commissioner, T.C. Memo. 2025-12