Bookkeeping basics

In short

A friend of mine ran a small bakery for six years and kept every receipt in a shoebox. You have probably got a shoebox of your own, or a drawer, or a pile on the kitchen counter. Bookkeeping is just the habit of writing down what comes in and what goes out, and doing it often enough that you can trust the answer. One approach many owners take is to keep one bank account and one card that touch only the business. Recording each sale and each expense within a week of when it happens is a common habit. A monthly check of your records against your bank statement shows whether the two agree. Some owners move a small slice of every payment into a separate savings account for taxes. If you are wondering how long to keep your receipts, the IRS page called How long should I keep records lists the periods.

The whole of it

What it is

I once watched a plumber pull out a crumpled napkin at the end of a hard year. Every number he owned was written on it, and half of them had coffee stains. He was a fine plumber. He was working harder than anyone I knew. But he could not say whether he had made money, and that hurt him more than any leaky pipe.

Bookkeeping is the record of your business money. It answers three plain questions. What came in? What went out? What is left? That is all it is. Accounting is the step after it, where a professional reads those records and helps you make sense of them. You do the first job so that someone can do the second. You can also do the second yourself when you are ready.

You are already good at more of this than you think. If you have ever balanced a checkbook, you have done the heart of it. A business just has more moving parts, and a few more rules about what the law asks you to save.

How it works

If you are holding a pile of receipts right now, take heart. The system underneath is simple. Every dollar has a date, an amount, a source or a purpose, and a proof. The proof is a receipt, an invoice, or a bank line. When you have all four, you have a good record.

A clean start comes from keeping your money separate. Many owners open a business checking account and run only business money through it. When personal and business spending mix, you can spend hours later trying to pull them apart, and mistakes creep in. A clean line between the two is a gift to your future self.

Next comes the choice of how you will count. Many small businesses use the cash method. That means you record income when the money lands in your account and an expense when you pay it. The other choice is the accrual method. There you record income when you earn it and expenses when you owe them, even before cash moves. The IRS explains both in Publication 538, Accounting Periods and Methods. For a small shop, cash is often the easier road. Read what the IRS says about which one you are allowed to use.

Then there is the tool. A spreadsheet works fine at the start. Simple bookkeeping software works too, and it can pull in your bank lines for you. What matters is not the tool. What matters is that you use it every week. A tidy spreadsheet updated on Fridays beats fancy software you open twice a year.

Each month, bookkeepers do what they call a reconciliation. That is a big word for a small job. You compare your records to your bank statement and see whether the two agree. If they do not, you hunt for the difference. It is like checking your change at the register. Sometimes it is a missed receipt. Sometimes it is a bank fee you forgot. Finding it early takes ten minutes. Finding it in April can take a weekend.

The numbers, and where to find yours

You care about a few numbers, and each one lives in a place you can check. Your income is the total of what customers paid you. Your expenses are the costs of running the business. Your profit is income minus expenses. It is the figure that drives much of your tax bill.

If you work for yourself, you likely owe self employment tax on your profit. The rate is set by law, so the site will show it here: the current figure, which the official source publishes each year. You may also need to send in tax payments during the year instead of waiting for one big bill. The IRS calls these estimated taxes. The due dates are on the IRS page for estimated taxes and in Form 1040 ES. The yearly threshold that decides whether you must file is the current figure, which the official source publishes each year.

Some records have to be kept for a set time. The IRS page called How long should I keep records lists the periods. Go by that page, not a neighbor's advice. Your bank statements, invoices, receipts, and mileage log all belong in that pile.

Your business type matters too. A sole proprietor reports on Schedule C, which is part of Form 1040. A corporation files a different return. The IRS Small Business and Self Employed Tax Center lays out the forms for each type, so check there for yours.

A worked example

Let me tell you about Marisol. She started a home cleaning business and ran it out of her own checking account for the first months. It worked until the day she tried to add things up. She could not tell a client payment from a paycheck from her other job.

So she opened a business account. In her first full month, three clients paid her. One paid 400 dollars, one paid 650 dollars, and one paid 350 dollars. Her income for the month was 400 plus 650 plus 350, which equals 1,400 dollars.

Her expenses that month were cleaning supplies at 120 dollars, gas for her car at 90 dollars, and a software fee of 30 dollars. Add them up, 120 plus 90 plus 30, and you get 240 dollars in expenses.

Her profit was 1,400 minus 240, which is 1,160 dollars.

Marisol knew that self employed people owe tax on that profit. She did not know her exact rate, so she chose a round figure to set aside while she checked with the IRS. She picked 25 percent as a cushion. Twenty five percent of 1,160 is 290 dollars. She moved 290 dollars into a separate savings account and left it alone.

At month end she pulled up her bank statement. It showed 1,400 dollars in and 240 dollars out, just as her records did. The two matched. She felt something she had not felt in months, and it was calm.

Notice what she did not need. She had no fancy tools. She kept one account, wrote things down, checked once, and saved a slice. Small steps, done on time.

Where it goes wrong

I have seen good people trip on the same few stones, so let me point them out kindly. The first is mixing money. It feels harmless at the time. It is not, because it blurs your view and it can cause trouble if the IRS ever asks questions.

The second is waiting. A receipt tossed in a bag looks small in March and looks like a mountain in January. Writing it down within days keeps it small. Photos of receipts on your phone are a fine start. Check the IRS record keeping guidance to see whether a digital copy meets the rules.

The third is spending your tax money. When a payment lands, all of it feels like yours. It is not. A share belongs to the government, and setting it aside first spares you a bill that can arrive like a stranger at the door.

The fourth is guessing at what counts as an expense. Not everything you spend is deductible. The IRS page on business expenses and Publication 535, Business Expenses, explain what qualifies. Those pages are worth reading. A tax professional can also answer questions, and there is no shame in asking. Even the best carpenter measures twice.

The fifth is giving up. Falling behind happens to nearly everybody at some point. Many people restart with the newest month and work backward. Progress beats perfection.

Questions to answer before you leave this page

Do you have one bank account that touches only your business, and if not, what is stopping you from opening it this week? Do you know whether you use the cash method or the accrual method, and have you read what IRS Publication 538 says about your choice? Where will you write down your income and expenses, and on which day of the week will you do it? Have you picked a day each month to check your records against your bank statement? How much of each payment will you set aside for taxes, and have you confirmed that figure with the IRS or a tax professional? Do you know how long the IRS says to keep your records, and do you have a safe place to keep them? If you fell behind today, which single month would you start with to catch up?