Record Keeping

Self Employment Blog #4

Important details #1

Record Keeping

The IRS requires that you keep accurate records of your income and expenses. Unfortunately, they don’t tell you how to do it. You want to establish a system that is simple, accurate, and easy to maintain. It can be a paper system or computerized, whatever works best for you. It is important to do your record keeping regularly. Do it at every week or at least every month. The goal of record keeping is to collect information together into the categories of income and expenses to determine your net income.

Do not throw your receipts under the seat of your car, in the basket on your counter top, or in a box under your bed. Do not take a big box of receipts to your CPA to prepare your return. Be organized. You need to know how you are doing as the year progresses, but you can also save yourself a lot of money in tax preparation fees when you come prepared.

One of the simplest systems on the market is the Dome Bookkeeping system. You can buy it at most office supply stores. It is a paper and pencil system and is smaller than a crossword puzzle book. With this system you record your income and expenses as they are incurred. So when you make a sale today, write it down. When you pay a bill, write it down. At the end of the month you summarize your expenses by category and tally up your year to date activity. At the end of the year you hand the book to your CPA to have your taxes prepared. Quick, simple, accurate, cheap, and it saves you money with your accountant.

Another paper system is called a One-Write System. You buy checks and a check register from a company like Deluxe (https://www.deluxeforms.com). A check register is created at the same time you write checks and makes a permanent record of each transaction. It also keeps your checkbook in balance. The check register has columns to “spread” your expenses. So every time you buy office supplies, you put the amount paid in the office supply column. At the end of the month you tally up the sheets. At the end of the year you summarize your activity for the full year to prepare your tax return.

You can use Excel or another spreadsheet program to collect your records. This would be set up like the One Write Systems mentioned. It can get very cumbersome if you have a lot of transactions. A power-user could come up with a higher-tech solution to doing the summary.

Quicken (http://quicken.intuit.com) or a similar personal finance program can do a good job of collecting the information together for you. It forces you to select a category and then prints reports telling you how the business is doing. You write your checks through the system and can then track what is owed to you. You should set up a data file for the business that is separate from your personal data file to reduce the confusion. These programs are fairly simple and accurate, and reconciling your checkbook is a breeze after the first month.

QuickBooks (http://quickbooks.intuit.com) is the premier small business bookkeeping program and it is related to Quicken. It can handle sophisticated business transactions and complex companies. The key to QuickBooks is to not over-think it. Use it to track your receivables, keep your checkbook balanced, and write your checks.

A one person sole proprietorship or LLC can generally keep good records with Quicken or Money (from Microsoft). QuickBooks is appropriate if you have a lot of clients you are billing or have a more complex business. If you are incorporated, QuickBooks or some similar program is the best choice. Excel is cumbersome, and the paper systems will become tedious.

Just remember to keep it simple.

The next blog will cover the tax implications you will face.