Beginners Guide to Bookkeeping

Are you making money from self-employment? If so, then you are required to keep good accounting records. IRS Defines Self-Employment Income, as income that is earned from carrying on a “trade or business” as a sole proprietor, an independent contractor, or some form of partnership.

Small businesses can hire a Bookkeeper, use a Bookkeeping service, or do their bookkeeping themselves manually or with the help of computer software. No matter what you decide you should have a basic understanding of bookkeeping principles.

Difference between an Accountant
and a Bookkeeper

Bookkeeping is the first part of the accounting process, so the work of a bookkeeper and accountant often overlaps. 

The difference between an Accountant and a Bookkeeper is an accountant is a professional who handles the bookkeeping and prepares financial documents like profit-and-loss statements, balance sheets etc. They perform audits of your books, prepare reports for tax purposes, and handle all the financial information that’s part of running your business.

Bookkeeping focuses on recording and organizing financial data, while accounting is the interpretation and presentation of that data.

Some small businesses will opt for an accountant depending on how complex their tax reporting and accounting needs are. An accountant’s services can get expensive for a small business. To cut costs some small businesses will use an accountant at the end of the year to audit their bookkeeping records and prepare their tax returns.

Getting Started:

In business, keeping records is crucial for a variety of reasons, including keeping track of the progress of a business, preparing tax returns, and keeping a record of receipts and deductible expenses which are all apart of the bookkeeping process.

Proper record-keeping for small businesses makes the process easier and keeps you compliant with the law. It will also help you in the long run, to be prepared in case of an IRS audit.

Most importantly, records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success. 

Opening a business checking account

You should always use a separate business checking account for business to keep track of income and expenses only. Do not use a personal checking account for business

Identify sources of your income

 Your records can identify the sources of your income. You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 

Keep track of your deductible expenses

Unless you record them when they occur, you may forget expenses when you prepare your tax return.

Keep track of your basis in the property

Your basis is the amount of your investment in property for tax purposes. You will use the basis to figure the gain or loss on the sale, exchange, or other disposition of property, as well as deductions for depreciation, amortization, depletion, and casualty losses.

The Type of Records You Should keep

The business you are in affects the type of records you need to keep for federal tax purposes. Your business records must be available at all times for inspection by the IRS.

You will need all Documents to Support items reported on your tax returns. If the IRS examines any of your tax returns, you may be asked to explain the items reported. A complete set of records will speed up the examination. 

Supporting Documents

Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents.

Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.

The following are some of the types of records you should keep:

  • Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:
    • Cash register tapes
    • Deposit information (cash and credit sales)
    • Receipt books
    • Invoices
    • Forms 1099-MISC
  • Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:
    • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transfer
    • Cash register tape receipts
    • Credit card receipts and statements
    • Invoices
  • Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and a description that shows the amount was for a business expense. Documents for expenses include the following:
    • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transfer
    • Cash register tapes
    • Account statements
    • Credit card receipts and statements
    • Invoices
    • Petty cash slips for small cash payments
  • Travel, Transportation, Entertainment, and Gift Expenses
    If you deduct travel, entertainment, gift, or transportation expenses, you must be able to prove (substantiate) certain elements of expenses. 
  • Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets.
  • Documents for assets should show the following information:
    • When and how you acquired the assets
    • Purchase price
    • Cost of any improvements
    • Section 179 deduction taken
    • Deductions taken for depreciation
    • Deductions taken for casualty losses, such as losses resulting from fires or storms
    • How you used the asset
    • When and how you disposed of the asset
    • Selling price
    • Expenses of saleThe following documents may show this information.
    • Purchase and sales invoices
    • Real estate closing statements
    • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transfer

Prepare your financial statements

You need good records to prepare accurate financial statements. These include income (profit and loss) statements and balance sheets. These statements can help you in dealing with your bank or creditors and help you manage your business. 

  • An income statement shows the income and expenses of the business for a given period of time.
  • A balance sheet shows the assets, liabilities, and equity in the business on a given date. 

Prepare your tax return

Last but not least, you need good records to prepare your tax returns. These records must support the income, expenses, and credits you report. Generally, these are the same records you use to monitor your business and prepare your financial statement.