How to Do it Yourself: A Crash Bookkeeping Course
Bookkeeping is the practice of tracking financial transactions so you see exactly what you are spending, where your revenue is coming from, and which tax deductions you can claim.
Why it is important:
- It helps you catch more deductions on your taxes. When you log every transaction by category, you know at a glance which expenses are tax- deductible, and don’t forget one-offs.
- It can help you get a loan. Banks will ask for financial statements, and not just those you download from online banking. You’re going to need to shows your expenses and revenue on an Income Statement.
- It can catch mistakes. Bookkeeping requires you to keep an eagle eye on every transaction. You’ll see bank errors, mistakes on invoices and service subscription fees you meant to cancel.
- It will help you budget. You’ll stay on top of your cash flow. You can see what’s an expense, vs. a loan or credit card payment. You’ll also be able to track business growth over time, and which months are busiest. This will help you plan.
How to Set Up Your Own Bookkeeping
You want to make sure your personal and business transactions are not intertwined so your earnings, spending, and net profit are clear to the IRS. C corporations in particular open themselves up to legal problems when their finances aren’t separate.
- Choose the single- or double-entry accounting system.
With double entry you record everything twice: once in Credit and once in Debit. Credit and Debit should be equal. It helps you create financial statements.
With single entry, you only record each transaction once. This works for sole proprietors with no inventory or employees.
- Choose cash vs. accrual accounting.
With the cash method, you only recognize revenue when you receive it, i.e., when you deposit the check. With accrual accounting, you recognize revenue when it is earned, for example, once you complete a project and write the invoice.
If you are a small business or just getting started, you can probably use the cash method. It’s easy to switch methods when you need to. If you earn more than $5 million per year, or manage large assets or investments, you’ll probably want to use the accrual method.
- Choose a bookkeeping system.
Your options are to do it manually with something like Excel, or use accounting software.
If you choose accounting software, you will pay a monthly fee for the software, which you can use to produce simple financial reports. You may need help from an accountant or bookkeeper to learn how to use the software.
- Categorize your transactions.
This helps you understand what you’re spending on each category. It can show what your tax deductions are. Not all transactions are equally deductible.
- Organize and store your documents.
You need to keep records for your bookkeeping, and not just in a shoebox.
There are two rules:
- For any expense over $75, keep your receipt to prove the expense
- Keep every receipt and financial record for three years
You won’t need receipts to file taxes, but you will if you get audited. We recommend digital storage with an online program like Evernote or Shoeboxed. That is acceptable to the IRS, and it is often simpler than keeping paper files.
- Make bookkeeping a habit.
Do it consistently for insights into your business and a happier life at tax time. At a minimum, enter all transactions once a month.
If all this sounds overwhelming, or not the best use of your time, there is another option. Hire a Cincinnati bookkeeping service like BookWerksTM, and we will do it all for you.