When you decided to start a business, you did so because you felt passionate about offering a unique product or service. It might have never occurred to you how much accounting and bookkeeping work you would need to do as well. Unfortunately, some new business owners become so overwhelmed by financial tasks that they ignore them or do them incorrectly. Not only can this lead to prompt business failure, it can cause tax problems with long-term implications.
Separate Your Business and Personal Finances
Small business owners, especially those with no employees, often make the mistake of using an individual bank account for both personal and business expenses. Tax time can become a nightmare when you don’t separate your business income and expenses from the start. If you operate as a limited liability corporation, partnership, or general corporation, federal law requires you to separate your finances. Although not required for sole proprietors, we highly recommend taking this step. You will need to have a business name to open a business checking or savings account.
Keep Track of Every Expense
If you don’t want to save every receipt, consider investing in a software program or smartphone application that allows you to scan or take a picture of receipts for automated storage. The Internal Revenue Service (IRS) doesn’t require you to keep receipts for purchases under $75, but we recommend that you do. It’s especially important to track the following types of expenses:
Business travel: Save all receipts related to business travel such as airline tickets, rental cars, and hotel reservations.
Entertainment and meals: If you meet with a client to discuss business and pick up the tab, be sure to record the date, reason for the meeting, and the person’s name.
Home office: This includes physical items that you purchase, such as printer paper and pens, as well as the percentage of your home that you use for business purposes.
Vehicle expenses: Like the home office, you can deduct the percentage of your personal vehicle that you use for business. This means you need to track when, why, and where you use it.
Determine Your Bookkeeping System
The IRS requires you to indicate whether you use the accrual or cash method of accounting. The first type means that you recognize income at the time earned and payments at the time billed, regardless of when you receive funds or pay an invoice. The cash method recognizes these two categories at the actual time that funds come in or you pay them out.
You also need to understand the differences between accounting and bookkeeping. Accounting is high-level and considers the progression of the business by analyzing statements provided by a bookkeeper. Bookkeeping is a daily function of recording and categorizing transactions as well as creating financial statements for the business.
These are just three key financial tasks every small business owner should do. Please contact us for additional tips or to request help managing your company finances. You need all the help you can get to run a small business successfully, and Doerhoff & Associates is here for you. We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner.