Bookkeeping and Accounting Basics
While keeping track of your business's finances may seem overwhelming, it's not that hard when you know the basics of accounting and bookkeeping.
Bookkeeping and accounting share two basic goals:
- To keep track of your income and expenses, which improves your chances of making a profit.
- To collect the financial information necessary for filing your various tax returns.
Sounds pretty simple, doesn't it? It can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records.
There is no requirement that your records be kept in any particular way. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable. (There is a requirement, however, that some businesses use a certain method of crediting their accounts: the cash method or accrual method. For more information, see Cash vs. Accrual Accounting.)
Three Steps to Keeping Your Books
The actual process of keeping your books is easy to understand when broken down into three steps.
- Keep receipts or other acceptable records of every payment to and every expenditure by your business.
- Summarize your income and expenditure records on some periodic basis (daily, weekly, or monthly).
- Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you're making or how much your business is worth at a specific point in time.
Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.
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