Bookkeeping Tips for Small Business

You don't need a CPA to keep good books for the business, but you do need a little know-how. Poor bookkeeping can cause a myriad of problems and significant losses, not to mention the potential for serious trouble with the IRS. If you own and operate a business here are a few tips to help keep the books straight and well organized.

1. Cash or accrual: Decide if your business should be run on a cash-based accounting method or an accrual-based method. Cash-based accounting is used if your income is counted as it is received. An accrual-based method counts income and expenses as they occur, not when it is actually in hand. For example, credit cards are accepted this would be recorded before actual funds are received or if inventory is kept on hand. However, the IRS only allows the use of the accrual method if there is $5 million in sales or if a large inventory is carried. For most small business this means sticking with the simpler cash-based accounting system.

2. Expense categories: When setting up a bookkeeping system determine business expense categories by looking at the tax return that will be filed. For example, if a Schedule C is filed, take a copy of a blank Schedule C and write down all the categories that apply to the business. Include those categories when setting up your bookkeeping system.

3. Switching from paper to computer: When switching a bookkeeping system from paper to a computer generated spreadsheet or bookkeeping software and before dropping the paper method, it is important to run dual systems for a few months to be sure both systems have the same totals.

4. Keep track of your expenses and income daily: Whether you use a pen and paper, a computer spread sheet, or bookkeeping software it is important to record transactions every day. Keep all receipts and log them into the system along with any income made that the day. Keep transactions organized by separating them by year and category.

5. Reconcile every month: Ensure the transactions that are recorded on bank statements are recorded in the books and the balances on statements agree with the balances in the books. Keep track of the amounts of any un-cleared and un-presented checks which will explain any difference between the bank statements and the balance in your books. Requesting a statement with a month-end cut-off date will help make reconciling easier.

Bookkeeping is the glue that keeps a business together, if records are not in good shape the business could fall apart. Keep the business healthy by keeping the books up to date and monitoring records on a regular basis. This practice will help find problems and correct them before it's too late.