Record Keeping for Businesses: Best Practices

Learn how to maintain proper business records to ensure tax compliance and smooth operations.

In Simple Terms

Record keeping means maintaining organized documentation of all your business transactions, income, expenses, and other financial activities. Good records help you file accurate tax returns, claim all deductions, and provide evidence during KRA audits. Poor records can lead to penalties and missed deductions.

Overview

Proper record keeping is a legal requirement for all businesses in Kenya. The Income Tax Act requires businesses to maintain books of accounts and supporting documents.

Benefits of Good Record Keeping

  • Accurate tax filing and claim all deductions
  • Evidence during KRA audits
  • Better business decision-making
  • Easier access to financing
  • Compliance with legal requirements

Why Record Keeping is Important

Good records are essential for several reasons:

Legal Requirement

The Income Tax Act requires businesses to maintain proper books of accounts. Failure to do so can result in penalties and prosecution.

Tax Compliance

Without proper records, you cannot accurately calculate your tax liability or claim deductions. This can result in overpaying tax or facing penalties for underpayment.

KRA Audits

During audits, KRA will request documentation. Without proper records, you may not be able to support your tax returns, leading to additional assessments and penalties.

Business Management

Good records help you understand your business performance, make informed decisions, and identify areas for improvement.

What Records to Keep

Maintain records of all business transactions:

Income Records

  • Sales invoices and receipts
  • Bank statements showing income deposits
  • Cash sales records
  • Credit sales records
  • eTIMS invoices (if VAT registered)
  • Records of any other income

Expense Records

  • Purchase invoices and receipts
  • Supplier invoices
  • Utility bills (water, electricity, internet)
  • Rent receipts
  • Salary and wage records
  • Transport and travel expenses
  • Professional fees
  • Insurance premiums
  • All other business expenses

Asset Records

  • Purchase documents for fixed assets
  • Depreciation schedules
  • Asset register
  • Disposal records

Employee Records

  • Employment contracts
  • Payroll records
  • PAYE deductions
  • NSSF contributions
  • NHIF contributions
  • Housing Levy records

Tax Records

  • Tax returns filed
  • Tax payment receipts
  • VAT returns and payments
  • PAYE returns and payments
  • Withholding tax certificates
  • Correspondence with KRA

How to Organize Records

Organize records systematically for easy retrieval:

Organization Methods

By Date

Organize chronologically (monthly or yearly folders)

By Category

Separate folders for income, expenses, assets, employees, taxes

By Type

Separate invoices, receipts, bank statements, contracts

Recommended Folder Structure

Business Records/

├── Income/

│ ├── 2024/

│ │ ├── January/

│ │ └── February/

├── Expenses/

│ ├── Rent/

│ ├── Utilities/

│ └── Supplies/

├── Taxes/

│ ├── VAT Returns/

│ └── PAYE Returns/

└── Employees/

Record Retention Periods

How long to keep records:

Minimum Retention Period

7 years from the end of the tax year to which they relate

Example: Records for 2024 tax year must be kept until at least December 31, 2031

Special Cases

  • Asset records: Keep for the life of the asset plus 7 years
  • Employee records: Keep for 7 years after employment ends
  • Ongoing disputes: Keep until dispute is resolved
  • Company records: Keep permanently for some documents (articles, minutes)

Digital Record Keeping

Digital records are acceptable and often more efficient:

Benefits of Digital Records

  • Easy to search and retrieve
  • Less physical storage space needed
  • Backup and security options
  • Access from anywhere
  • Integration with accounting software

Digital Record Requirements

  • Records must be readable and accessible
  • Maintain backup copies
  • Ensure security and access controls
  • Keep original format when possible
  • Use reliable storage systems

Best Practices

Daily Practices

  • File receipts immediately after receiving them
  • Record transactions daily
  • Reconcile bank statements monthly
  • Keep business and personal records separate
  • Use accounting software for automation

Monthly Practices

  • Review and organize all monthly records
  • Reconcile all accounts
  • Prepare monthly financial summaries
  • Backup digital records
  • Archive completed months

Annual Practices

  • Prepare annual financial statements
  • Review and update record-keeping system
  • Archive old records (after 7 years)
  • Review compliance with record-keeping requirements
  • Plan for the next year

What to Do During a KRA Audit

  • Provide requested documents promptly
  • Be organized and professional
  • Explain any discrepancies clearly
  • Cooperate fully with auditors
  • Seek professional help if needed