Here is a super simple but essential introduction to tracking your small business income and expenses – also known as bookkeeping.
Please note: This article is meant to be a general introduction to bookkeeping only. It only discusses bookkeeping at an extremely basic level and it is not all inclusive. We officially recommend that you hire a professional to process the books of your business. Serious errors can occur and you may be subject to taxes, penalties, and fees if the IRS adjusts your tax account.
Bookkeeping 101 – You Need Dedicated Bank and Credit Card Accounts
There’s lots of free checking accounts available out there and you can get credit cards that offer great points. Open one of each specifically for your business.
Likewise, be sure not to pay for business expenses out of your personal accounts. You can always move money from your business to your personal account if you want to take a draw (or the other way around if you want to loan your money to your business). Do that as needed to comply with the “no co-mingle” rules.
Besides it being required, the nice thing about doing everything properly like this that the bank and credit card statements serve as your journal. There is no need to log these transactions as they will all appear on the bank statement each month.
If you do not have a dedicated bank account set up yet, then you will have to log all of your business transactions.
Bookkeeping Guide – Categorize Your Income and Expenses
Bookkeeping involves more than just having your bank statements (or your log). You have to categorize your expenses and sum them all up each year. This is how they are reported to the IRS. They must be reported this way so the IRS can quickly see (if they decide to look) if your business expenses are ordinary, necessary, and reasonable. It’s also nice as the owner of the business to see where you are spending (and how much) on typical expense types. Many businesses do this every month, although technically you only have to categorize your expenses once a year.
Note that in bookkeeping, categories are called expense “accounts”. This is confusing because that does not mean a “bank account”.
“Account” pretty much means “category” in this context.
The Profit and Loss Report (P&L)
Typical expense accounts (categories) include expenses like insurance, office supplies, cost of labor, legal and professional fees, automobile expenses, business rent, software, etc. When you have all of your expenses categorized, this report is called a “Profit and Loss” report or P&L. A P&L does not have to be fancy, it just needs to list the income and deductible expenses. As the business owner, this is the report that you review to track your expenses. It’s also what you need to give to your business tax preparer so he or she can prepare the business tax return to present to the IRS each year.
I have a simple P&L “organizer” for you here. Just click the link to download…
You will likely not have all of these expense accounts, but you will have some of them. Use it as a guide. Note that just because something is listed on this form, does not mean that is it deductible specifically to your business. Fill it out as best as you can and give it to your tax preparer at the end of the year. Or better yet, hire us to do your taxes and give it to us. You do not have to be sitting locally in Hawaii for us to serve you. Tax Services Oahu – Home.
Simple Bookkeeping – Tools of the Trade
You can simply take your bank statements each month and prepare your P&L from those. There are many different types of bookkeeping software to help you do this. Perhaps the most popular is “Quick Books”. Another popular format is “Fresh-books”. If you don’t need fancy software, a simple spreadsheet will suffice. Actually, you can write down your P&L on a cocktail napkin if you have to. You do not need to get fancy.
In addition to small business income tax services, we also offer full service monthly bookkeeping where all you have to do is give us your bank and card statements for each month. If you think you would like to hire us to do your books, check out our bookkeeping services here.
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