Accurate bookkeeping is a pillar of success for businesses of all types and in all industries. Managing your small business finances doesn’t need to be overwhelming. With the right tips and strategies, small business bookkeeping can ensure your accounting transactions are recorded, classified, and organized.
Good bookkeeping holds your business together and makes future successes a possibility. In order to maintain a healthy business, you must monitor your records regularly. This consistent monitoring gives small business owners the opportunity to spot problems and issues, providing time to correct them before they become insurmountable challenges.
Bookkeeping for small businesses can be more complex than first time business owners anticipate. However, proper bookkeeping measures are crucial for proper management of business resources and tax purposes.
Whether you plan on handling your small business bookkeeping yourself or hiring a professional bookkeeper, it’s important to understand best practices for managing your financial records. These tips make bookkeeping for business owners easier than ever.
1. Use Accounting Software
While you could manually manage your records and transactions, going paperless with cloud-based accounting is a much more efficient, organized way to handle the basics of small business bookkeeping. Many accounting software products offer small business packages. These provide vital templates for your business records, including invoices, check printing, and deposit slips. Cloud-based accounting systems allow you to access the information you need from anywhere.
Using reliable software makes it much easier input and cash flow. It allows for easy recovery, and makes it simple to return to a specific date or incidence, saving you time and money. As you browse different bookkeeping software programs, know what you need out of it. Most accounting software options provide various levels. One may provide only ledger and cashbook capabilities, while the most extensive options will provide ledger, cashbook, inventory, point of sale, and foreign currency transaction features.
Your business may not need certain features, but the flexibility provided through bookkeeping software can save you hours of work. Most software allow small business to export various reports to help create personalized plans, produce detailed charts for company or client reference, and combine various facets of reporting.
There are many software options available to small business owners. Take your time to find a new system. Implementing too many too systems too quickly can overwhelm your employees, and it’s important to ensure that you’re investing in the right system. Give yourself enough time to learn new systems, and keep up with manual records in the meantime.
Tip #1: Invest in advanced small business bookkeeping software to avoid costly mistakes and streamline the accounting process.
2. Keep a Chart of Accounts
Your small business needs to maintain a chart of accounts, which is a list of accounts that categorizes the financial transactions in your business. You may possess a variety of account titles, depending on your business processes.
- Liabilities: If your business owes money to outside vendors, this is considered a liability. This could mean mortgage payments on your business’s building or loans on company cars.
- Assets: Your small business assets are items you have in your possession. This could refer to product inventory or money in your company bank account.
- Owner’s Equity: This refers to anything and everything that your small business owns. Any money that you’ve invested in your business is categorized as equity.
- Income: This refers to the earnings you’ve made from service or product sales.
- Expenses: This refers to the money going out for expenses that help you run the business day to day. This can include everything from office furniture and supplies to payroll.
Within these categories, you can place further folder accounts for business necessities. For example, within your Liabilities account, you may also have separate accounts for your building mortgage. Within your Expenses account, you may have an account specific to advertising costs or payroll costs. This type of organization can help you track the money coming in and going out of your business.
Don’t set up too many accounts, as it will complicate records and make it more difficult to manage transactions. Only create the accounts you need and use regularly. Don’t waste time setting up specific accounts for a singular customer or vendor; Create accounts in general terms: for example, set up an account called “Office Supplies” not “Office Depot Purchases”. This is too specific and will force you to create more accounts when you purchase supplies from another vendor.
Tip #2: Keep financial records organized with generic accounts; don’t get too specific.
3. Remain Diligent with Tax Forms
If you have employees or paid contractors, it’s important to remain diligent with the essential tax forms. A crucial facet of bookkeeping for small businesses is ensuring your employees have the forms they need on time to avoid interest or penalties.
During each payment period, be sure to set aside enough money to cover the payroll tax applicable to your employee’s wages. The hire of even a single employee invokes your responsibility to file tax forms and pay for payroll taxes. Every state has its own particular set of tax obligations. You’ll be tasked with maintaining employee forms like the W4 and the I9. You’re also tasked with maintaining records on employer matching, unemployment, withholding, and worker’s comp.
There are numerous forms you’ll need to stay on top of:
- W2: The Wage and Tax Statement form gives an employee a summary of the wages they received in the tax year, and also outlines the deductions they’ve taken. You are required by law to give all of your employees this form by the specified due date. You must also file a W2 with the Social Security Administration.
- W3: The Transmittal of Wage & Tax Statements provides a summary of all the wages and deductions you’ve paid for the tax year. This must also be filed with the Social Security Administration.
- 940: The Employer’s Annual Federal Unemployment Tax Return reports the Federal Income, Social Security and Medicare taxes deducted from your employee’s paychecks. It also indicates how much of the Social Security and Medicare you paid as an employer.
- 1099-Misc: The Miscellaneous Income form must be filed for any independent contractor you paid at least $600 during the tax year.
- The Annual Summary & Transmittal of US Information Return provides a summary of all 10999 forms that you used to independent contractors. This must be filed along with your contractors’ 1099 forms.
All of these have a deadline of January 31, so make sure you give yourself enough time to get the forms filled out and to their proper destinations before this date.
Tip #3: Provide tax forms by indicated government deadlines to avoid penalties and interest.
4. Never Combine Personal and Business Finances
This is one of the most important bookkeeping tips you need to keep in mind. Even if you’re the sole employee in your small business, mixing personal and business-specific transactions can make it much harder to organize and track your records. You must treat your business as a viable entity. This means maintaining separate checking accounts, open a business credit card, and consider establishing an LLC for your small business. In the event of an audit, this tip will keep you out of hot water with the IRS.
Failing to separate your personal and business finances may indicate to the IRS, incorrectly, that your business is a hobby instead. The government agency will deny any deductions or losses listed for hobbies. Maintaining your business’s legitimacy requires detailed separation. The more clear the separation, the less likely it is that the IRS will audit your business.
If you contribute money into your business, whether it’s in the form of cash or property assets, make sure you designate how the money is to be considered. Is it a loan, or is it an owner investment? Make sure that your designation is verified with detailed paperwork.
If you make a mistake and use a personal credit card for a business expense, or vice versa, simply document your mistake and edit the mistake within your business or personal records. So long as you keep a paper trail of your mistakes and rectify the issue, the IRS is not likely to bat an eye at the occasional misstep.
Tip #4: Always open a new bank account for your small business, and keep business finances separate from personal finances.
5. Outsource Your Bookkeeping Needs
Business owners playing double-duty as bookkeeper may find it helpful to outsource some of the accounting tasks and responsibilities. Outsourcing has become a popular option for small business owners, as it’s cost effective and accurate. Small business bookkeeping tasks might take an untrained employee an entire week to complete, whereas a trained bookkeeping professional could complete the records and organization within just a few hours’ time.
When it comes to outsourcing bookkeeping for your small business, you may choose to assign a single task, or hire someone who can handle a combination of your needs. Some of the common responsibilities a professional bookkeeper can handle include:
- Keeping track of daily transactions
- Preparing sales invoices
- Sending out invoices
- Managing accounts receivable ledger
- Managing accounts payable ledger
- Entering purchasing invoices
- Preparing creditors and sales reports
- Processing payroll
- Handling sales tax and payroll tax
- Preparing monthly reports
- Entering transactions to a cash book
Whether you’re looking to hire a freelance bookkeeper who can complete a few singular bookkeeping tasks, or need full-time outsourced help balancing your books and preparing financial records for an accountant, take the time to details exactly the responsibilities you’re looking to outsource.
Tip #5: Outsourcing some or all of your bookkeeping responsibilities can ensure your records are well maintained, accurate, and timely.
6. Call in the Professionals
When it comes to small business bookkeeping, there’s plenty that can go wrong. In certain situations, it’s worth the investment to call in the professionals. An expert in bookkeeping and accounting can help you set up your system for success from the very beginning. You may also find an advisor that’s specialized in accounting issues specific to your industry. Hiring an in-house professional can help you avoid an IRS audit and ensure your business is positioned for ultimate success.
Even if you have a professional bookkeeper, you may want to hire a professional consultant bookkeeper to review your books and indicate any errors or issues. This type of review can save you a great deal of money and frustration. If the consultant finds a bevy of errors, you may want to consider training for your current bookkeeper; the more proactive you can be, the better maintained your records will be.
Community Tax offers accounting services tailored to your small business bookkeeping needs. Manage your business finances with the help of a professional team made up of accountants, CPAs, and bookkeepers to streamline your accounting processes. From overseeing deposits and credit transactions to payroll account management, our team of seasoned professionals can help you refine your small business bookkeeping.
Tip #6: Some small business bookkeeping issues require a professional hand. Hire an expert when necessary and invest in your success.
7. Practice Weekly Reviews
It’s not enough to review your books on a month-by-month basis. To stay abreast of all the latest goings-on in your business, it’s important to stay updated about the state of your business as often as possible. Allocating a few hours each week to small business bookkeeping strategies can help you better manage your cash flow, understand your expenses, and keep you abreast of current invoices.
Weekly monitoring and evaluation of income and expense helps you better handle any issues that arise. The more often you check in with your records, the better off your business will be in the long run.
Tip #7: Review your books on a weekly basis to keep an eye out for any potential issues or discrepancies.
8. Save Paperwork
There’s plenty of paperwork and documentation to deal with in small business bookkeeping. You must keep these important papers safe and well organized. Why? If the IRS decides to audit your books, you’ll need to have documentation to show your tax filings are legitimate and valid. If you’re looking for help from an investor or private money lender, they’ll also need access to your financial statements. In some situations, investors may need supporting documentation to verify these statements.
There are a variety of documents you should store:
- Credit Card Statements: Store credit card statements for all business accounts and any business purchase made on a personal account.
- Bank Statements: Store bank statements for any and all business accounts, including checking, savings, and money market accounts.
- Cancelled Checks: Make copies and scan any cancelled checks. Most modern banks offer electronic copies of cancelled checks.
- Receipts: Store receipts for any and all purchases made. Make scanned copies and keep all receipts in a single cloud folder. While the IRS only requires receipts for business expenses that exceed $75, keeping track of any smaller expenses can help you keep your books in order and give you a more comprehensive overview of the financial state of your business. The better organized your expenses, the less likely you are to miss out on lucrative tax write-offs.
- Customer Payments: Make copies of all payments received from customers, including checks and credit card payment slips.
- Customer Invoices: Store backup copies of paid customer invoices.
- Vendor Bills: Make copies of all paid vendor bills.
- Deposit Slips: Make copies of all deposit slips.
- Sales Receipts: Make copies of all sales receipts.
- Cash Register Tapes: If your business uses a cash register, store the cash register tapes and record within your POS System or accounting software.
- Tax Returns: Maintain and store copies of all the tax returns your business has filed. This includes any documentation that will help verify the deductions you claimed.
Store important paperwork for at least five years. While there is a statute of limitations on IRS audits, if you don’t file your taxes or file fraudulently, the IRS can ask for documentation decades later.
Tip #8: Keeping important paperwork and documentation stored in cloud-based systems can keep crucial data and personal information safe and secure.
9. Consider Lucrative Deductions
There are many tax deductions that can benefit your small business. Part of bookkeeping for business owners is maintaining the proper records to ensure you get the most out of your tax deductions.
Healthcare Tax Credit: Small businesses can benefit from the healthcare tax credit. Businesses that employ fewer than 10 employees that make an average of $25,000 per person can benefit the most. To claim this credit, you must file with Form 8941. If you didn’t have to pay taxes, the credit may roll over into the next tax year.
Auto Expenses: If you have to use your own car for business purposes, or your business owns the car under a separate entity, you can deduct some of your auto expenses. You may choose to claim expenses through the actual expense method which requires you to keep track of and deduct all business-related auto expenses. You may also use the standard mileage rate method, in which you deduct the standard mileage rate—as designated by the IRS—for each mile driven, plus all business-related parking fees and tolls.
- Charitable Contributions: If your small business has made charitable contributions throughout the year, you can deduct the amount you’ve donated. In order to maximize the amount you get from these deductions, donate appreciable stocks instead of cash. This allows you to deduct the worth of the stock at the time of contribution, instead of deducting what the stock was originally purchased for. If you donate two shares that you purchased at $150 each two years ago, and that stock is now $300, you can deduct $300 when you file your taxes. This appreciation can add up, and serve your business’s bottom line well.
- Software Deductions: Your new small business bookkeeping software can provide tax benefits, as well. Generally, business software must be depreciated over a 36-month period, but there are exceptions. If software comes with a computer and its cost isn’t separately stated, it’s considered to be a part of the hardware, depreciating over a span of five years. Section 179 allows business owners to write off an entire computer system, along with its bundled software in the first year.
Tip #9: There are numerous small business tax credits you can take advantage of; consult with a tax professional to determine which credits and deductions your company qualifies for.
9 Essential Tips for Small Business Bookkeeping: A Recap
As a recap, here are nine essential tips you should keep in mind for your small business bookkeeping:
- Invest in advanced small business bookkeeping software to avoid costly mistakes and streamline the accounting process.
- Keep financial records organized with generic accounts; don’t get too specific.
- Provide tax forms by indicated government deadlines to avoid penalties and interest.
- Always open a new bank account for your small business, and keep business finances separate from personal finances.
- Outsourcing some or all of your bookkeeping responsibilities can ensure your records are well maintained, accurate, and timely.
- Some small business bookkeeping issues require a professional hand. Hire an expert when necessary and invest in your success.
- Review your books on a weekly basis to keep an eye out for any potential issues or discrepancies.
- Keeping important paperwork and documentation stored in cloud-based systems can keep crucial data and personal information safe and secure.
- There are numerous small business tax credits you can take advantage of; consult with a tax professional to determine which credits and deductions your company qualifies for.
Community Tax Can Help With Bookkeeping Services
Even the most profitable of business can go under due to faulty or incorrect bookkeeping. Ensuring your company has enough cash available to handle current and future financial obligations is key. Tracking your cash flow and expenses can help you pave the road to small business success.
Keeping organized, accurate financial records is crucial for success. Small business bookkeeping means more than tracking how much you’re making and how much is going out. You must monitor money owed and due from outside vendors, keep track of business assets, and ensure employees are receiving the correct payments. Proper financial records can provide you with the details you need to make important business decisions.
If you need assistance in setting up crucial bookkeeping strategies, call Community Tax today. Our team of seasoned professionals can help you determine the best ways to maintain and store the important documentation and financial records pertinent to your business. Balanced books and organized financial records provide your business with the grounding you need to make intelligent decisions about your business, ranging from company expansion to hiring new employees.