As a business owner, you know that bookkeeping is critical to the success and longevity of your company. But what you may not know is that there are rules of bookkeeping which, if followed correctly, can help you save money come tax time.
In this blog post, we will outline 10 of the most important bookkeeping rules for business owners. By following these golden rules of bookkeeping, you can keep your books clean and organized, maximizing your deductions and minimizing your tax liability. Read on to learn more!
1. Keep business and personal accounts separate
Maintaining separate business and personal accounts is the cornerstone of effective bookkeeping. It’s not only a vital tool for tracking expenses, and income, and preparing accurate financial statements – it will make sure you’re in the best shape possible if you ever need to borrow money or apply for a loan. Clear financial document organization is essential when dealing with personal accounts.
When you use a personal account for business purposes, there can be serious consequences. The IRS may consider the income to be taxable, and if funds are not properly accounted for, fines or penalties may be imposed.
If you fail to report business activities associated with personal accounts, you can face criminal prosecution for tax evasion. It is essential to maintain separate business and personal accounts to remain compliant with the IRS.
2. Keep accurate records of all financial transactions
Having accurate records is essential to the success of any bookkeeping system. You should document every financial transaction, including Date Account Debit Credit information for purchases, sales, bank deposits, inventory levels, loans or payments made between businesses or individuals.
For example, if a customer purchased an item for $100 on October 1st, in Date Account Debit Credit information, two accounts are involved in the transaction: an asset account and a cash account:
- Record the date of the transaction (October 1st)
- Debit your revenue account for $100
- Credit your cash account for $100.
Keeping detailed records of these transactions will help you stay in compliance with the IRS and ensure that all financial activity is accurately accounted for throughout the year.
3. Classify employees, expenses, and income correctly
Proper classification is crucial to the accuracy of your business books. If you’re unsure how to classify employees, contractors, types of expenses, and sources of income, this may be an area to enlist the help of a business bookkeeper.
The chart of accounts is one of the most important components of bookkeeping. It categorizes all of a business’s financial transactions, as well as its assets, liabilities, and equity. This categorization makes it easier to track expenses and income, allowing business owners to make well-informed decisions that improve their bottom line.
Every industry uses a different chart of accounts. Before you start any bookkeeping, confirm that you understand the chart of accounts for your business.
4. Understand the bookkeeping process
Knowing the bookkeeping basics is essential for managing your business finances. Make sure you understand debits, credits, accounts receivable, accounts payable, and other basic bookkeeping concepts.
Bookkeeping is an important process for any business, as it helps to keep track of finances and ensure accuracy in financial statements.
By keeping accurate records of all financial transactions, you can minimize tax liability and make sound financial decisions for your business.
5. Use a cloud-based accounting software for ease of use and accessibility
With many accounting software options available, it can be difficult to decide which is best for your business. A cloud-based solution such as QuickBooks or FreshBooks makes bookkeeping simple and efficient.
Using a cloud-based system allows you to access your financial data from anywhere with an internet connection, giving you the flexibility to manage your books from any location.
6. Delegate bookkeeping tasks to save time
If bookkeeping is not your area of expertise, it may be beneficial to outsource some of the tasks. This can save time and money in the long run by allowing you to focus on other aspects of your business.
7. Review your books monthly for better preparedness come tax season
Although tax season can seem far away, it’s important to stay on top of your bookkeeping throughout the year.
Reviewing your books monthly will help you identify any discrepancies or errors and ensure your records are up to date. This is also a great way to stay organized during an audit and be available for loan applications.
8. Follow best practices to keep your books clean and organized
Finally, following bookkeeping best practices will help you maintain a clean and organized system throughout the year.
Make sure to back up your records regularly, keep detailed notes of all transactions, and use proper account codes when entering data.
9. Have a backup of your business financial records in case of an IRS audit
Ensure you have copies of all your financial records in the event of an IRS audit. This includes income statements, expenses, bank statements, and other documents related to your business finances. Make sure you keep these organized and readily available if needed.
10. Understand the importance of bookkeeping for small businesses
Bookkeeping is an essential part of any small business. In addition to helping you with your tax return and IRS audits, it also provides insight into how your business is performing financially. With accurate bookkeeping records, you can make informed decisions about spending, manage cash flow more effectively, and create financial projections for the upcoming year.
Conclusion
Bookkeeping is an important task for any business, regardless of size. By following the best practices outlined in this blog post and enlisting help when needed, you can ensure accuracy and efficiency in your bookkeeping process.
If you’re not keeping track of your business finances, you’re at risk for IRS audits and other costly mistakes.
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