If you’re an entrepreneur, I’m speaking to you right now! Let’s talk about what defines bookkeeping. Bookkeeping is simply a recording of the financial affairs for your business. Each time you make or spend a dollar, it is recorded. It gets no simpler than that! Gains or losses affect your business books; the final amount at the bottom reflects that.
You can also think of an accountant like me as your doctor, and your business books are what we use to give you live data about the health and financial well-being of your business. Is your business in good health? Is it struggling and in need of assistance? Do you need to shut down your business entirely? Bookkeeping lets us know!
To put it another way, bookkeeping is your business story.
Every transaction that your business incurs is a sentence in your business books. To go even further, every type of transaction is a sentence as well! If your business spent $10, that’s a sentence; that also means that your company’s bank account will have $10 less than what it should, because of what you spent. We can narrow it down further and say that the $10 was spent on food; it’s another sentence in your business books.
At the end of a particular year, whatever money you have left in your business bank account would be seen as your profit. However, you wouldn’t get to that amount WITHOUT the different transactions to tell the story for your business!
It may not seem like much, but bookkeeping impacts EVERY aspect of your business! Suppose you’re a business that has multiple products and services. You can check your bank account and see that you put in $20,000 this month. However, without the bookkeeping aspect, you’re unable to tell which products and services are doing well, and which ones are actually costing you money!
What’s more, if you deposited $20,000, and only have $2,000 left, a lack of bookkeeping leaves you drawing a blank as to where that $18,000 went!
There’s a question that I get quite often.
I’m just starting my business, is it important to have bookkeeping?
It doesn’t matter if you’ve just started today, and haven’t registered with the state, filed a DBA or anything of that sort. You need to start your bookkeeping from the moment your business is created! If you’ve not made any money….you STILL need bookkeeping! It allows you to keep track of the money you’ve already spent for your business, and the money you’ve invested into your business!
Some professionals will tell you that you don’t need it right away….take it from me; start bookkeeping the day you spend or make money in your business, whichever comes first!
Many of you will ask about the purpose of bookkeeping. The MAIN reason you want to get your business books in order is to protect you from taxes! The next reason is for your own business knowledge! I’ve seen far too many entrepreneurs (and this includes you brick and mortar folks too!) that don’t realize that accurate bookkeeping has a direct correlation to your taxes! Without the accurate numbers, I’ve seen one of two things happen.
1. Business owners overpay taxes because they don’t have the correct information needed to file their taxes properly.
2. Business owners underpay taxes due to overstating expenses, which is also due to inaccurate bookkeeping.
As an accountant, my goal is to help you save money, and to educate you about some of the common pitfalls that entrepreneurs face when it comes to finances, and bookkeeping is definitely one of them! The only way I know of to beat the tax system legally (and by beat, I mean not end up in trouble!) is to make sure that your business books are accurate, organized, and that you can account for any and all expenses in your business!
The IRS doesn’t specifically say that you need bookkeeping, but you’d be doing your business a disservice without it! Your records can be either paper or electronic, but you’d do well to start keeping track of everything ASAP!