Accounting for a small business is different than managing your personal finances. Small business management requires exact records and proof of expenses to support tax deductions, income and other aspects of business finances. Fortunately, accounting for a small business is not difficult and there are many aspects applicable to all types of small businesses.
The most essential aspect to accounting for your small business is to keep records of every financial transaction. Keep receipts of all purchases and returns, document money transfers, payments, salary disbursements and other income received by the business. You will need these records to file the business's taxes and other required reports as well as to keep tabs on the company's financial health and stability. If in the unfortunate event you are audited, you will have these records as proof of your claimed deductions.
Keeping records includes maintaining a register of business transactions that occur during the course of business. Any expenses or income the business incurs should be recorded either in a computer program or a ledger. The ledger provided by a bank may not be large enough to include all pertinent information, and you may need to purchase a business-specific ledger from your local office supply store to properly record all the information of the transaction. The business ledger should include the date of the transaction, amount, parties involved and any other identifying information about the transaction.
There may be certain transactions that do not automatically generate a receipt, such as the sale of a product you have made according to the customer's specifications or a payment you receive without sending an invoice. In this instance, you should create a receipt for your records. Whether or not you send this receipt to the customer will depend on the circumstances, but you should have a receipt to enable you to easily identify income or expenses that might otherwise be unidentifiable.
Keep It Separate
Do not mingle your business financial records with your personal financial records, even if you are a sole proprietor with no employees. Maintain separate credit cards, checking accounts and transaction registers for yourself and the business. Do not give yourself unlimited access to business funds, but instead withdraw a salary on a regular basis. The amount of this salary can differ depending on how well the business is doing come payday, but it should always occur on the same day or days of the month and be recorded in both transaction registers.
Stay on Schedule
Do not let prolonged periods of time pass between the time of the transaction and recording of it in the ledger. Additionally, do not let large amounts of time pass between you checking the business's finances. Update your ledger at least once a week, file all receipts and paperwork twice a month, and reconcile your bank accounts at least once a month to make sure that you have the most up-to-date records possible. Letting paperwork pile up will make it much more difficult for you to organize, record and file everything that needs to be handled.