Better Bookkeeping Tips for the Self-Employed
It comes to no one’s surprise to learn that bookkeeping is an important business activity. However, it is also one of the most time-consuming tasks. You need to know bookkeeping basics to ensure that you correctly record business expenses. Understanding efficient bookkeeping will also help you understand the reports prepared by outsourced bookkeeping providers.
Let’s take a look at some effective bookkeeping tips for self-employed individuals. The tips mentioned in this blog post are also applicable to small business owners.
1. Keep a Record of All Expenses and Revenues
You must keep a record of expenses and revenues from the get-gos. Make sure that you record the business expenses as soon as you start the business. Consider keeping receipts for all purchases.
Keeping a record of all business expenses is important as it may reduce your tax due. The taxation agency allows certain expenses to be deducted from the taxable income.
You should also keep the business and personal expenses separate. This is important as the tax authority may impose a penalty for entering wrong information in the tax files. It is important that you set up a separate dedicated business account to keep personal and business expenses separate.
A dedicated business account will also allow you to determine the cash flow position of your business. You will have full knowledge about business-related cash inflow and outflow during any given period of time. You can also easily determine whether customers have paid invoices by looking at the business bank account.
2. Know the Difference between Capital and Operational Expenses
As a self-employed individual, you can claim various operational expenses when submitting tax returns. Some of the operational expenses that you can claim when filing your taxes include:
- Travel costs
- Advertising expenses
- Legal fees
- Salaries
- Motor Vehicle costs
- Entertainment and meals for clients
- Licensing fees
- Office Supplies
You can also deduct capital expenses from the income. But the capital expenses can be deducted over their useful life. Examples of capital expenses include business vehicles, equipment, and machinery.
To claim business expenses, you must keep a detailed record in your books. The bookkeeping statement must show the exact expenses incurred. The tax agency will impose a fine if it is found that you entered the wrong figures when submitting the tax files.
Make sure that you keep a record of even the most basic expenses such as stationery, train tickets, and stamps. The small amounts aggregate to a large figure that can reduce your tax liability.
You must record even small trips by car for business purposes. You can also claim the amount for using a cycle. The IRS allows employers to deduct qualified bicycle expenses from the income statement.
You can also claim a portion of the home utility bill if you use your home as an office. The IRS allows the deduction of internet, telephone, and electricity expenses. Moreover, you can also claim a portion of the home rent or mortgage when using the home as an office.
3. Keep Your Receipts and Invoices Organized
You must store all the receipts and invoices. These should also be organized in a way that it will be easy to retrieve them during an audit. You will have to show the receipts of major purchases during an audit otherwise the tax agency may impose a fine.
Consider buying a filing system to organize files. You must categorize the receipts based on the type of purchases.
You must also keep a digital receipt of all your receipts and invoices. This will save time in verifying the purchases and sales during an audit.
4. Hire an Outsourced Bookkeeping
Another important bookkeeping tip is to hire an outsourced bookkeeping service provider. This will allow you to get professional help in recording business transactions.
A professional bookkeeper will record expenses and revenues in compliance with the generally accepted accounting principles (GAAP). Hiring the services of a professional bookkeeper will save time in recordkeeping.
Outsourcing bookkeeping tasks will allow you to focus on important aspects of your business. It will also ensure an accurate record of business expenses and revenues. The accurate record of financial transactions will help ensure the correct filing of tax returns.
5. Use a Cloud Accounting Software
Using a cloud accounting system will save you a lot of time in recording business expenses. Accounting software saves a great deal of time and effort in recording expenses as compared to manual accounting.
If you have hired outsourced bookkeeping services, you should ask about the accounting software they use to record expenses and income. Make sure that you get familiar with the software. This will help you in communicating with the bookkeeper.
6. Assess Accounts Regularly
You must create a schedule to review bookkeeping records. Consider setting aside time each week for reviewing the books.
You must make sure that the books contain an accurate record of all business expenses. You should examine the books to ensure that there are no mistakes in recording transactions.
When you let an outsourced bookkeeping provider record business transactions, you can dedicate more time to important business activities. It will allow you to focus on marketing, lead generation, quality customer service, and business relationship building.
7. Enter Detailed Records
You must enter detailed records of all your business expenses and revenues. You must keep a record of business activities such as cost per unit, hours spent on tasks, miles traveled, and payments made by bank and credit card.
Keeping a detailed record of all business activity will ease the task of auditing accounts. It will also let you make effective business decisions.
You must know about expenses that can be deducted from the income to reduce tax liability. All work-related expenses can be deducted. This includes web hosting services, office software, and also outsourced bookkeeping fees.
8. Account for Tax Bills
A common mistake self-employed individuals make is not calculating tax bills. You must set aside some money for tax bills each month. You should calculate the estimated tax bill at the end of the tax year and save accordingly.
Experts recommend setting aside about 30 percent of income each month for taxes. This is important because if you don’t pay the tax bill, the IRS will impose a penalty that can create financial difficulties.
9. Keep a Proper Record of Invoices
You need to create a proper record of all invoices. Make sure that you keep a copy of all invoice issues. The invoice should have a reference number that can help you trace invoices during an audit. For instance, you can create invoice numbers as 100A, 101A, and 101B. The letter can denote the category of expenses.
You can also add the date of sale in the customer invoice number such as 102022-1. Adding a date in the invoice number will help you easily locate the invoice whenever required.
You can also use an invoice number based on the name of the client. For instance, you can use JA1, JA2, and so on for James Avery and JS1, and JS2, for Jones Smith. It is up to you to select the invoice numbering system that works best for you.
10. Card or Cheque Payments
You should use a card or cheque to make payments. Also, you should request your customers to make payments using this method. This will ensure that the amount is deposited or deducted directly from your bank account.
Bank receipts and payments will make it easy to track the inflow and outflow of cash. It will help you to keep track of all income and expenditures. You should make sure that all the bank payments and receipts are also entered into the account.
11. Don’t Leave Taxes in the Last Month
You must start preparing tax months before the due date. You should ask your accountant to start preparing tax returns about two months before the due date. If you leave the task till the last month, you may miss the deadline.
Late payment of tax returns will result in a penalty. So, the sooner you sort out your finances, the easier it will be for you to file the tax returns promptly.
12. Know the Difference Between Accounting and Bookkeeping
A lot of business owners don’t know the difference between accounting and bookkeeping. Many use the two terms interchangeably. The fact is that bookkeeping, and accounting are two different activities.
Bookkeeping is carried out by professional bookkeepers who record business expenses and income. The bookkeeper records all the business activities based on accounting standards and generally accepted accounting principles (GAAP).
Accounting involves preparing financial statements that include cash flow statements, income statements, and balance sheets. The statements are prepared by chartered public accountants (CPAs). The accountants take accounting information recorded by bookkeepers to prepare financial statements for the company.
Accountants also prepare tax reports based on the relevant laws. They are experts in the
Accountants also prepare tax reports based on the relevant laws. They are experts in IRS requirements and prepare tax returns accordingly. Professional CPAs can analyze the financial information to maximize your tax savings for you. They will also give you advice on cutting costs to boost profitability.
Accountants and bookkeepers usually coordinate in preparing financial statements. Sometimes their activities overlap depending on the specific business setup. You need to understand the responsibilities of both professionals to know who to ask for the financial position of your company.
13. Single Entry Vs. Double Entry Bookkeeping
You must also know the difference between a single and double-entry bookkeeping system. Single entry accounting system involves entering bookkeeping information in the cash book. There are no ledger accounts with a single-entry accounting system.
A single-entry accounting system involves entering all transactions in the cash book. You only record expenses when you make payments. Also, you record income when customers make payments to you.
Double entry accounting system is different from a single-entry accounting system. The revenues and expenses are not recorded when payments are received and made. Every transaction involves a debit and credit entry.
With a double-entry accounting system, the transactions are entered into two accounts. Unlike a single-entry accounting system, unpaid payments and receipts are recorded in the books. Expenses are recorded as a debit entry while revenues are recorded as a debit entry.
An increase in assets such as machinery and equipment is recorded as a debit entry while an increase in liability is recorded as a credit entry. Also, a capital increase is recorded with a credit entry.
Double entry accounting system is better than a single-entry accounting system.
Each expense in the double-entry accounting system involves a debit and credit entry. This results in a more complete picture of the financial position. Moreover, it is the reason that banks and other financial institutions prefer a double accounting entry system.
Another benefit of a double-entry accounting system is that it helps in error detection. The debit and credit entries must be equal. A difference in debit and credit amount when preparing the trial balance means an error in record keeping. The difference once traced results in an accurate representation of accounting information.
Double entry accounting system is more flexible compared to a single-entry accounting system. The system allows the preparation of financial statements including income and loss statements and balance sheets. With a single-entry accounting system, you can only prepare a cash flow statement that won’t present an accurate picture of your financial position.
Income
You must prepare customer invoice reports each month. Send invoice reminders to the customers so that they are reminded to make payments when due. You should make sure that all invoice payments are recorded in the goods. You should wait for customers to receive the invoice before making an entry in the books.
You should enter credit sales once the customers have acknowledged the invoices. This is important to ensure that the books accurately reflect the financial position. Make sure that all invoices are recorded so that the books present the correct cash flow position.
Remember to send an invoice soon after you have completed offering services to customers. You should include all costs involved in offering services to your customers. Make sure that all costs are accounted for when preparing invoices.
You can also send a tentative invoice to customers when the work is still in progress. Let your customers know that the price is not final. You should continue to send the draft invoice but avoid recording the tentative invoices. This is according to the conservative principle of accounting that specifies that revenues should only be recorded in the books when they are certain.
Once the final invoice is sent, you should check your bank account to see if the payment is received. Consider checking your bank balance online once a day to know about the payments received from customers.
You should consider emailing credit invoice statements once a month. You should show your customer’s balance due each month. Regularly reminding your customers about the amount due will help in timely receipts that you can record in your books.
Expenses
Expenses should be recorded as soon as they occur. You should record the expenses when they become due. It is important to make sure that you don’t lose the record of the receipts. Scan it and save it to a cloud accounting system. But don’t throw away the paper receipts as they may be required during an audit.
Have you purchased goods on credit? You must enter the bills into the accounting software once a week to ensure that the books reflect an accurate picture of your business.
An important thing to remember is that you must enter credit payments only if you are using an accrual accounting system. You should enter the credit bills in the accounts only when you make the payment.
You should reconcile the accounts at the start of the month. You should ensure that all the invoices of the vendor have been added to the accounts. Once you make the payments, you should ensure that the books are updated.
Banking
You must mark the payments received from customers against the invoice. Make sure that you deposit the customer check within a day or two or receipt. This is important to ensure that your cash flow remains positive.
You should also set up direct bill payments made to your suppliers. You can set up a direct check or credit card payment system with your suppliers. Most suppliers have some system that allows direct bank deposits to encourage early payments.
You must also reconcile the bank payments at least once a month. This is important to ensure that the bank records match the bookkeeping records in the cash book. Reconciling the books with the bank statement will help you know the correct financial position of your company. Make sure that you pass the necessary correcting entries in case you find any discrepancies during the reconciliation process.
Review Accounting Reports
You should look at the accounting reports once a month to ensure that all the receipts and payments are made. It is important to review the accounting reports after the bank reconciliation has been done. This is important to ensure that your accounting records show an accurate financial position.
Bank reconciliation will ensure that the balances in the books and the bank statement tally. It will allow you to identify bounced cheques and other issues with payments. The resulting report will present an accurate financial position of your business.
You should know how to read the reports to find out financial performance during a particular period. Review the reports to know how much customers owe you. You should know about the amount that you owe to suppliers by looking at the reports. In addition, you should know how much is due from your customers.
Knowing the accurate position of your business is important to make informed business decisions. It will help you know when to take a new line of credit to meet business expenses, and when to invest to expand your business.
14. Know How to Move Records from Books to Software
You may be using a manual accounting system and later decide to switch to a computerized accounting system. It is best to make the move to the accounting software at the end of the accounting year.
You must transfer the records when the accounting statements have been prepared and every transaction has been recorded. This is important since you will have to maintain manual and computerized accounts when you decide to transfer halfway through an accounting year.
You won’t have to enter every transaction in the books when you start recording in the computerized accounting system at the start of the new year. You just have to transfer the balances instead of entering all the information.
Getting the help of an outsourced bookkeeping provider will help in transferring from a manual to a computerized accounting system. The experienced accountants will take care of the task of transferring the balances to the accounting software. In this way, you will save a lot of time and effort in entering the accounting information in the computerized accounting system.
Conclusion
You must make sure that your bookkeeping process results in an accurate record of all business income and expenses. You must select a bookkeeping system that best meets your requirements.
Whether you record expenses using a manual or computerized accounting system, it is important to keep detailed records of each business activity. An outsourced bookkeeping provider will save you time with inaccurate record keeping.
Maxim Liberty is a trusted outsourced bookkeeping service provider in the US. Our experienced accountants can make record expenses and income as per the accounting standards and principles applicable in your state. You should contact us today to know how our services can help you keep your financial information organized.
