Posted on: December 21st, 2022
Required to do your taxes
This is one thing you can’t get out of because at the end of the year when you get your taxes done, your tax preparer will require an organized financial report. If you don’t have this then you scrambling through your bank accounts, your checkbooks, anywhere for any shred of evidence that you actually did business that year.
In order to avoid this embarrassment, I recommend getting started before the year begins. It will save you time and may even save you money.
It is so easy to spend money, sometimes that money has a way of disappearing. With good systems in place, you can avoid that scenario and know exactly how much you made, what you spent it on and how much you have left.
Equipped with this information, you can create a budget for yourself based on accurate information.
The IRS is kind enough to tell us what we can and cannot deduct, it’s up to us on whether we want to use them. They are not, however, going to hold our hands and keep track of those expenses for us. That is up to you as the business owner.
A meal with a client that was 6 months ago may fall through the cracks and you miss out on some serious deductions. With a system in place, you can look back at that expense with receipt and know what kind of deduction it is.
Depending upon what kind of business you have, this may come into play. Banks and Loan institutions require you to have financial documents to prove that you can handle the loan that they are offering. No proof, no loan.
Business that have high inventory or require large machinery have need of loans to keep themselves in business. You can’t offer the service your clients want unless you have what is needed to get it done.
A decimal is a funny thing. In the wrong place, your transactions of 19.50 becomes a 195.0 that you didn’t spend or even worse. Catching these errors before you start making decisions based on income you have or don’t have can save you time and money.
Regularly organizing and updating your books can help you catch mistakes that may overdraft you later. Rather than six months from now, you can catch them now before they bite you.
They are not easy steps by a long shot. If you make it a point to learn basic bookkeeping, it will help you in the longer run. Sometimes when you are in the gutter, trying to get those transactions reconciled, it helps to stop and take a break.
Re-read these steps and make sure you doing everything right.
First thing is first, make sure you have a business account set up. You need to be able to separate business and personal expenses.
Why? Liability is one big reason. If you have set up an LLC, you’re probably told to do so in order to keep yourself legally safe from any client disagreement. Your client can’t come after you and your personal assets.
The same thing goes with your bookkeeping, if there is no line drawn between your personal and business, you might end up owing debt that your business incurred.
This one is a difficult one. Take it from someone who has organized books after someone mingled business and personal. Cleaning up after the fact is a nightmare and can cost you more money just to do you taxes.
If you can’t figure out the difference between personal expense and business expenses, you might miss out on important potential deductions. This means your CPA is spending more time doing your taxes and charging you for every hour spent organizing.
There are two main bookkeeping methods: single-entry and double-entry bookkeeping.
For those of us that grew up on checkbooks, you understand Single-entry bookkeeping. Everything is recorded once as either an expense or income. Assets and Liabilities like inventory, equipment and loans are tracked separately.
You haven’t gone from hobby to business yet, you’re not sure if what you doing is something that will make you money or not. You’ve done some favors for people who in return have paid for your services. Single-entry just might be all you need. It’s simple, fast and good for basic bookkeeping.
Your business is more established; people are paying you on a regular basis. Your ordering inventory and then selling that or using it within your business. The double-entry system is more suited for businesses that are past the hobby stage.
With double-entry bookkeeping, all transactions are entered into a journal, and then each item is entered into the general ledger twice, as both a debit and credit.
Most accounting software today is based on double-entry accounting and if you hire a bookkeeper or accountant, double-entry is what they’ll use.
I promise you that this isn’t an accrual thing that we just come up with to keep you busy. You see what I did there. All joking aside, you have to decide what accounting method you’re going to use.
Cash is King right? Well it is if you use the Cash method. You record transactions only once money has exchanged hands. If you bill a customer today, those dollars don’t enter your ledger until the money hits your bank account.
A lot of small business opt into this method because it’s easy to maintain, doesn’t require you to track receivables or payables, and tells you exactly how much cash you have on hand at any given point in time.
This method may sound accrual, but it can save you a lot of headaches. The accrual method records income when you bill your customers, in the form of accounts receivable (even if they don’t pay you for a few months). Same goes for expenses, which you record when you’re billed in the form of accounts payable.
If you offering services or product to customers on a regular basis, this is the method you’re going to want to use. You’re going to have a better idea of what is really going on in your business. Have you done services or sold product that you haven’t gotten paid for. Do you owe money to vendors that you have not paid for yet?
This method provides a long-term view of your business that cash account cannot provide.
You wouldn’t bring a sledge hammer to a dance rehearsal, unless that dance featured Freddy Krueger. Same thing goes with your bookkeeping; you need to make sure you have the right tools for the right job.
You need to record every single transaction that is made in your business. This helps you or your bookkeeper to catch more deductions and makes your life easier if you get audited.
Six months later, an unmarked receipt for lunch at a restaurant might not mean much to you. Was it a client lunch? Did you treat your employees after a successful quarter?
The way you categorize transactions will depend on your business and industry. As a rule of thumb, your transactions fall into five account types – assets, liabilities, equity, revenue, and expenses. Each of those types can be broken down into sub accounts like a different revenue such as donations vs sales from products.
Cloud accounting is an extremely popular choice, such as Quickbooks, Xero or Wave. These are powerful tools when you know what you are doing. If you do not know what you are doing or perhaps do not have the time to learn, they can cause stress more than they can help. It can also be disappointing when you find out at the end of the year you have been using it incorrectly.
If right now, you need a free option. Check out this great excel Income statement template.
If you want someone else to do your bookkeeping for you, you could sign up with me. Make an appointment with me for a 30-minute discovery call and we can find out how I can help you. I can prepare your monthly financial statements, give you expense reports with actionable financial insights and even file your taxes for you when the time comes. It is a one-stop shop.
Every transaction you make need to be categorized and entered into your books. This helps you or your bookkeeper catch more deductions and makes your life easier if you are ever audited.
A receipt for lunch might not look like much to you 6 months later. Was it a client lunch? Did you treat your employees after a successful quarter? With properly categorized transactions, you can avoid doing any long investigations.
If you are going to do your own bookkeeping, it’s worth talking to a pro when you set up your system to make sure the accounts you create align with your industry standards and CPA expectations.
Almost ever bookkeeping software has a way for you to scan receipts and send them over to the software for recording. This feature is built into the system itself so there is no cost. However, if you want a more robust system, I would highly recommend Hubdoc.
With Hubdoc, not only can you scan receipts, but you can also scan legal documents and any forms that are necessary for you business. This prevents anything from being lost and if there is a fire or any sort of damage where your physical copies are stored in a filing cabinet.
With hubdocs, it is like mission control for all your important documents. Sync your bills, receipts and invoices and their data to your accounting software. Create rules to automate how your docs are published and coded. Leverage Hubdoc’s integrations to keep everyone on the same page.
The IRS’ golden rule on deductions is that they must be both ordinary (a common expense in your field) and necessary to your business. For example, gloves would be an ordinary expense for a lawn and landscape worker, but a 900 pair of gloves might not fall into the category of necessary.
In some cases, even if the expense is ordinary and necessary, you might not be able to deduct all of it for your taxes. Just because you do most of your work from your dining room table does not mean that you can deduct your entire monthly rent. The IRS has put together a comprehensive guide on business deductions on your behalf. With this you can know if it is deductible or not.
Putting bookkeeping on the to do list can be quite easy because of how busy running a business can be. In order to avoid that you should schedule your bookkeeping.
Try scheduling bookkeeping first thing in the morning or perhaps last thing in the evening. You might not even have transactions come in every day, so the bookkeeping will not even take more than 5 minutes. When you on top of it, you can categorize transactions with a clear memory of what happened.
If you are months or years behind, you might want a bookkeeper to do some catch-up bookkeeping for you. Contact me for a for a discovery call to discuss your business needs.