Bookkeeping is the organized process of recording a company's financial transactions. Proper bookkeeping lays the foundation for the making of all key operating, investing, and financial decisions.
10 Small Business Bookkeeping Steps for Success:
1. Build a budget. Your budget is the foundation on which you build your business's success. After all, if you don't have a roadmap of where you are going and how to get there, you'll never reach your destination. Let's Talk Budgets
2. Obtain business accounting software. There are all types of software available from free to monthly fees. QuickBooks is one of the most commonly used accounting software for small businesses, but there are other options out there. Top 5 easy to use accounting software for small businesses
3. Open a separate business checking account.
4. Reconcile your checking account. Reconciling your business bank account, allows you to compare your internal financial records against the records provided to you by your bank. A monthly reconciliation helps you spot any unusual transactions that may be caused by fraud or accounting errors. Reconciling can also help you spot inefficiencies.
5. Track sales. This is where your accounting software comes in. But remember, the information you are able to pull from your accounting program is only as good as the information you put in.
6. Deposit ALL sales. It’s important to maintain a clean and clear record of your business’s income. Depositing all your sales into your business account(s) will do just that.
7. Pay your business expenses with a business account check or business credit card. It’s never a good idea to pay for business expenses from your personal account.
8. Pay business expenses before you pay yourself. Put simply, if you don’t have enough money in the bank to cover your expenses AND pay yourself, you don't get paid.
9. Generate and use a profit and loss (P&L)statement. The profit and loss statement (also called a statement of operations or statement of income), is a report that shows the profitability of a company during the time interval specified in its heading. Know Your Key Financial Reports
10. Pay yourself with owner’s draw. An owner's draw is an amount of money taken out from a sole proprietorship, partnership, Limited Liability Company (LLC), or S corporation by the owner for their personal use. It's a way for you, the owner, to pay yourself instead of taking a salary. It is taxable personal income.
Cash Basis of Accounting vs Accrual Basis of Accounting
The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Under cash accounting, revenue and expenses are only recognized when money changes hands. Accrual accounting recognizes revenue when it's earned and expenses when they're billed (but not paid). Cash basis accounting is easier, but accrual accounting portrays a more accurate portrait of a company's health by including accounts payable and accounts receivable.
· Deduct business expenses in the tax year you pay them.
· Report income in the tax year you receive it.
· Deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year.
· Report income in the tax year you earn it, even though you may receive payment in a later year.
Documentation and Deductions
7 Years of Documentation must be maintained for the following:
· Bank statements
· Credit card statements
· Proposals or contracts
· All payroll records (must hold for 4 years)
· Income tax records
· Mileage logs
Deductions for Vehicles for Company Use and Home Office Space
Allowable deductions for vehicles are based on the vehicle use and can include expenses such as:
Deductions to consider for home office space for your business include:
· Mortgage interest
Here’s how to calculate space used exclusively for business purposes:
· Measure the room/space in square footage
· Example: 12x12 space = 144 square feet
· Total square footage of home = 2,000 square feet
· Divide 144 into 2,000 = 13.9 percent.