Bookkeeping basics for small business owners

IRS Publication 583 (opens in a new tab) describes the two main accounting methods:

• Cash method: you record income when you receive it and expenses when you pay them. It is simpler and common among very small businesses.
• Accrual method: you record income when you earn it and expenses when you incur them, even if money has not moved yet. It gives a fuller picture of a business that invoices customers or holds inventory.

Some businesses are required to use accrual, and changing methods later can involve IRS rules. A tax professional can tell you which method applies.

The chart of accounts is the list of categories in your books: income accounts, expense accounts, and balance sheet accounts for what you own (assets, such as cash and equipment), what you owe (liabilities, such as loans and card balances) and owner’s equity. Bookkeeping software comes with a starter list you can trim or add to. Keeping it short and consistent makes reports easier to read.

Lenders commonly ask for recent profit and loss statements and balance sheets, along with tax returns and bank statements. Our loan-ready guide explains what is typically requested.

1. Make sure every transaction for the month is categorized, with receipts attached.
2. Reconcile each bank and card account so your books match the statement balance.
3. Review unpaid invoices and unpaid bills.
4. Run the profit and loss and balance sheet and look for anything odd.
5. Set aside money for taxes and note anything to ask your tax professional.

The SBA’s manage your finances (opens in a new tab) guide and the IRS recordkeeping (opens in a new tab) pages cover the records behind all of this.

Options range from spreadsheets to invoicing apps to full cloud accounting software. Instead of a ranking, compare on the features your business uses:

• Bank and card feeds that import transactions automatically.
• Invoicing and payment tracking, if customers pay you later.
• A payroll add-on or connection, if you have or plan to have employees.
• Receipt capture and attachment.
• Multi-user access, including access for your accountant.
• Inventory tracking and sales tax handling, if they apply.
• Monthly cost as your business grows.
• Data export, so you can leave without losing your history.

Many owners keep their own books at first and bring in a bookkeeper when transactions pile up, and a CPA or other tax professional for tax returns, entity questions and planning. Signs it may be time: you are months behind, payroll or sales tax is involved, or a lender is asking for statements you cannot produce. SBA resource partners (opens in a new tab) such as SCORE and Small Business Development Centers offer free and low-cost help, and IRS Publication 334 (opens in a new tab) is a useful reference for sole proprietors.

• Never reconciling accounts.
• Software that will not let you export your data.
• Running payroll yourself without understanding tax deposits and filings.