There are so many fun parts to owning your own business . . . . small business record keeping is not one of them! However, keeping good financial records is one of the best things you can do for your business. Not only will an efficient bookkeeping system make your life easier come tax time, but understanding your financial position will enable you to make better choices day to day.
Keep in mind that even if your small business is still at the hobby level, you still need to keep financial records. Unfortunately hobby income also has to be included on your tax return!
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[thrive_headline_focus title=”#1 Keep it Separate” orientation=”left”]
The number one thing any small business owner needs to do is keep their business finances completely separate from their personal finances. No more depositing business income into your personal checking account or paying for business expenses with the credit card you use for your groceries.
Why is this so important?
First, it is much easier to track your business finances if your business money is separate from your personal money.
Second, if you claim that you are a business, the IRS wants to see that your business financial activity is kept completely separate from your personal money. When you co-mingle funds, the financial protection provided by an LLC begins to deteriorate, and in an audit situation co-mingled funds means both your personal and business transactions can be audited.
To keep your business finances separate from your personal, the first step is to set up a bank account and credit card for your business activities, keeping them separate from your personal bank accounts and credit cards.
There are several ways to set up separate business accounts. You could go to the bank and open up a true business checking account with a debit card in the name of your business. This could be done at a physical local bank, or you can set up an online business checking account through a provider such as Capital One. Some people choose to use their business PayPal account for their business income and a PayPal debit card for their expenses.
If you don’t want to set up a bank account in the name of your business, you can dedicate a personal account you already have for business activities and use a credit card you already own as your designated business activity card. This scenario makes sense in the early days when you are just getting started, before you have had time to register your business, or when you are still at the hobby level. Eventually, you will want to create a business account in the name of your business, but just using separate personal accounts initially is fine.
Whichever method you choose, you need a way to keep business transactions completely separate from your personal money. This is the first step to good small business record keeping.
[thrive_headline_focus title=”#2 Save Receipts” orientation=”left”]
In addition to avoiding co-mingling of funds, the next step to small business record keeping is saving all of your receipts.
Some of your receipts may be physical receipts from a store. I keep all of my physical receipts for the year in one file folder. Sometimes it is helpful to mark at the top what the purchase was for. The more information you have to prove that a purchase was a valid business expense, the better. This can especially be true for bloggers who are buying materials and supplies for their blog projects.
Many of your receipts will be electronic receipts that are emailed to you. Simply save all of your electronic receipts in one email folder so that you can immediately access when needed.
To satisfy the IRS, you need to have access to your bank statements. As mentioned earlier, this can be a bank account in your personal name, or a true business bank account. Often receiving a physical bank statement in the mail costs money, but be sure you will have access to your online bank statements for at least 3 years after you file the related tax return. In almost every situation, the IRS stipulates that keeping your records for 3 years after you file your tax return is sufficient. When in doubt, you can easily keep them longer by downloading your bank statements to a business financial records folder on your computer.
According to the IRS, the burden of proof is on the taxpayer to prove and validate the income and expenses that they report. Therefore, keeping thorough records is very important!
[thrive_headline_focus title=”#3 Use Accounting Software” orientation=”left”]
The last step to easily maintaining business records is to use an accounting/bookkeeping program. I promise you that accounting programs are easy to use and understand, and will make your life much easier!
There are many online accounting program options available, some of which are free, and others which are a low monthly cost. Most can be set up to automatically import your transactions which is a huge time saver!
QuickBooks is the best accounting program and the one I highly recommend. QuickBooks allows you to link to your bank accounts and credit cards and automatically imports your transactions for you. The program has many features and reports that accountants love, plus their program is easy for the novice to use as well. Their reports are simple to generate and are easy to understand. What I like about QuickBooks is that it can grow with you as your business grows. You may not need all their features and reports now, but you may need them someday. And if you ever hire an accountant to help you, they’ll be glad you are using QuickBooks because most accountants are very familiar with their product. Plans start at $20 a month. Choose their Simple Start version, not their Self-Employed version! Take a look at my quick start guide to QuickBooks for a little help getting started.
Your small business record keeping does not have to be painful. By following these three simple steps you will have accurate financial records in just a few minutes a month. Reviewing your records will help you make wise financial decisions for your business. Having your record keeping done at the end of the year will allow you to easily complete your tax return, or hand the information over to your tax accountant. By being proactive about your business record keeping you will save yourself many hours of stress and aggravation.