Simple Accounting 101

Introduction

You need good records to know where your business
is headed financially, as well as to be able to complete
your income tax forms.

Remember that to find your profit, you subtract your expenses
from the money that your business brings in from revenue. Many
times a business will be in the red the first number of years in business.
Your expenses will turn out to total more than the income you bring in.

However, with a home business, in its first years,
this is often an advantage - lowering your taxes.
By keeping good basic records, it will help your accountant
or tax preparer when April 15th comes around.

But always remember, you are in business to make a profit -
shoot for this as soon as you can.

Although it is not necessarily required by the IRS for all items,
you should keep all your business transaction receipts in a file.
Save them in case you need them.

You will need a set of books, each with its own purpose.
There are ledgers available in stationery stores that combine
all the necessary books, with a system, all into one. That may
be the best way for you to start. They are simple, easy to do
(with instructions), and inexpensive.

There are also computer software programs that will track your
accounts and books, such as "Quickbooks", "Microsoft Money" and "Quicken".

We will go over the individual books to your bookkeeping system.

Your General Ledger

This will be a list of your transactions each day.

It will have columns for: date (of the transaction), description,
check #, check amount, credit card amount, perhaps a check box
to indicate income or expense, and a column to itemize which type
of income or expense it is.

Expense Ledger

This book will have a column for each type of expense.
Your business may have expenses that are particular to it.

But most businesses would have columns for: postage & shipping,
office supplies, phone, printing, vehicle expense, interest expense,
utilities, insurance, labor expenses and samples. You can add other
expense columns that may be particular to your business.

Income Ledger

Here is where you will record your income. Each time you receive
payment for whatever product or service you offer, this is where it is tracked.

There will be columns for the amount, and the source of the income.

Depreciation Ledger

Your office equipment and furniture are tax deductible,
but there are certain rules in the way you are permitted
to take the deductions.

You need a ledger to list office furniture, computers,
phone systems, fax machines, etc. These major items
are generally depreciated, which means only a certain amount
of their cost will be deducted each tax year.

You will record the purchase price, if bought new -
or the fair market value, if brought into the business used.
Then you will record the amount that is deducted as
a depreciation expense each tax year.

There are ways in which some items, though,
can be totally deducted in one year. The IRS has publications
that describe what is eligible and how to do it.

Tax Withholding

If you have organized your business as a corporation,
you will need to consult your accountant, as we will not
be covering corporation taxation here.

But if you are a sole proprietorship, a partnership,
or even a Limited Liability Company, you may be able to use these ideas.

If your business is initially conducted part time,
as a side business, while you hold another job, or perhaps
your spouse has a job - this will simplify matters immensely.
You need to make sure that enough is withheld from your paycheck
to cover taxes you will owe.

If you expect to have a loss, then you probably won't need
to make any adjustment in your paycheck withholding. If you are
beginning to make a profit, it will be an easy matter to estimate
how much tax you will owe from your business enterprises,
and then adjust your paycheck withholding to cover it.

Once your business is your sole occupation, as well as that
of your spouse, you will definitely need to make tax payments
to the IRS on a periodic basis. So you will need to plan for that
in your budget. You will make these Estimated Tax payments on
April 15, June 15, September 15, and January 15.

Bank Statements

You will receive your checking account bank statement once a month.

Most banks put instructions on the back of the statement
on how to reconcile the account. This ensures that
the checking account balance you have listed is accurate,
and that you have not made any mistakes
(or the bank either, for that matter!)

You should reconcile your account as soon as possible
after receiving your statement. This way you will know
how much cash you have, and avoid bouncing checks.

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