Bookkeeping and Accounting Basics
by
Attorney Stephen Fishman
Learn the basics of accounting and bookkeeping for your small business.
Many new business owners are daunted by the mere idea of bookkeeping and accounting. But in reality, both are pretty simple. Keep in mind that bookkeeping and accounting share two basic goals:
- to keep track of your income and expenses, which improves your chances of making a profit, and
- to collect the financial information necessary for filing your various tax returns.
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. )
Depending on the size of your business and amount of sales, you can create your own ledgers and reports, or rely on accounting software.
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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