Small Business Bookkeeping is just one of your most important responsibilities a small business owner will have. If you are making money from self-employment full or part-time you are considered a small business owner and the success of your business depends on creating and maintaining an effective record-keeping system. It does not matter if your business is a sole proprietorship, partnership, or corporation.
For tax purposes, you are required to keep good accounting records. Most importantly, the record-keeping system you use must be suited to your particular business needs. 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.
Benefits Of Keeping Good Records
The number one reason for keeping good records is to be in compliance with the law! Record keeping is also about understanding your business, now and in the future. Reasons why you should keep good records include:
1. Detail Tracking
Owning a small business will require you to track a significant amount of information, such as customers, sales, inventory, and expenses. Without a proper record-keeping system, tracking important details of your business may be impossible and can lead to you paying far more taxes than you should have.
2. Legal Compliance
As an owner, you may hold various licenses, permits, insurance, contracts, etc.. As an employer, you will be required to maintain and report employee payroll for tax purposes.
3. Tax Preparation (Federal, State, and Local)
You need good records to prepare your tax returns. Good records of your business financial transactions may be able to save you thousands of dollars. Your records must support the income, expenses, and credits you report. You need Supporting documents including sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents.
Generally, these are the same records you use to monitor your business and prepare your financial statements. The financial statement may include income (profit and loss) statements and balance sheets.
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.
Common Bookkeeping Methods
With manual bookkeeping business accounting records are entered into a notebook or journal. You should have a basic understanding of the types of small business accounts there are and debits and credits. You will also have to decide what accounting method you will use to enter your transactions.
By far computer accounting software is a great option for handling your bookkeeping needs. I could not live without it! You don’t have to worry about having extensive knowledge of accounting. Computers transfer the right numbers to the right accounts and make sure those numbers get put on the proper side of the account, the debit side, or the credit side.
If you are starting your first business, you will quickly find out how important accounting software is to the success of the business. Accounting software keeps track of business financial records such as sales, expenses, inventory, and assets. The software delivers many advantages over manual systems, helping you to execute, manage, and track your critical financial transactions and related financial activities.
Small business accounting software will help to systematically organize your financial information, in a way that is easy to access. For example, if you want to know if a certain bill was paid, an accounting system should be able to tell you not only when the bill was paid, but the check number, and other details, such as details you may have recorded about the vendor. If you lose an invoice or a bill, information for sending duplicate invoices or bills can be found in the program.
You can also save money on tax preparation every year because your information will be well organized, not in manually-entered notebooks or in shoe boxes. You will also be able to generate specific income and expense reports as needed.
Spreadsheet software is commonly used in business to track information about clients, inventory, sales, employee timesheets, and much more.
Not only should small business owners keep good records, but owners should also know which of those records to retain and for how long. Record retention is the practice of keeping business and personal records over time.
The Internal Revenue Service (IRS) determines some record retention guidelines. Other retention requirements are legal in nature, such as what may be required by contract with those you do business with. Expert recommendations vary. Also, retention schedules vary by region. For example, a state may have a different statute of limitation for legal liability (lawsuits). Check with your attorney for legal requirements. Check with your accountant for financial-related requirements.
Three Key Points to Remember
1. As a small business owner you will need to track a significant amount of information. No matter the type, size, or complexity of your business, establish and maintain a proper record-keeping system that is suited to your particular business needs.
2. Regardless of whether you use a computer system, cloud-based computing, or a combination of these two, you will need to think about business accounting software.
3. Pick one record-keeping system or use a combination—but start now.