You do not need to understand double-entry accounting to keep good books. You need a consistent method, a separate bank account, a sensible set of categories, and the discipline to reconcile every month.
Cash or accrual
| Cash basis | Accrual basis | |
|---|---|---|
| Income recorded | When money arrives | When earned, even if unpaid |
| Expenses recorded | When money leaves | When incurred, even if unpaid |
| Strength | Simple; mirrors your bank balance | Shows true profitability of a period |
| Weakness | Can badly misstate a period with slow-paying customers | Profit on paper while short of cash |
Many small businesses use cash basis because it is simpler and it is permitted for tax purposes below certain thresholds. Businesses carrying inventory, or above the IRS gross receipts threshold for the small business exception, may be required to use accrual. The threshold is indexed and changes, so check the current figure rather than a remembered one.
Keep your books on the basis your tax filing requires, but look at an accrual-style view of receivables and payables when making decisions. Cash basis alone can make a month look excellent purely because a large invoice happened to clear.
The chart of accounts
Your chart of accounts is the set of categories every transaction is filed under. Two rules make it useful:
- Detailed enough to answer questions you actually ask. If you want to know what you spend on subcontractors, that needs its own account.
- Not so detailed that categorising becomes guesswork. Forty expense accounts you cannot reliably distinguish produce worse data than fifteen you can.
Start from your accounting software's default for your industry, then prune what you will never use and add what you specifically want to track. Changing it later is possible but breaks year-on-year comparisons, so a little thought up front pays off.
The monthly routine
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Import and categorise
Pull in bank and card transactions and assign each to an account. Rules for recurring vendors turn this into a review rather than data entry.
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Reconcile
Match your books to the bank statement so the closing balances agree. This is the step that catches duplicates, missing transactions and errors — and it is the one most often skipped. Unreconciled books are unreliable books.
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Chase receivables
Review what is outstanding and how overdue. See managing cash flow.
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Set aside tax
Move your tax percentage into the separate account. See estimated quarterly taxes.
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Read the two reports
Profit and loss for the month, and a balance sheet. Ten minutes comparing against the previous month tells you most of what you need to know.
Receipts and records
The IRS requires records that substantiate income and deductions. A bank statement line shows an amount and a vendor but not the business purpose, which is what substantiation means.
- Keep receipts for expenses you deduct. Digital copies are acceptable if legible and complete.
- Note the business purpose for anything ambiguous, especially meals and travel.
- Mileage needs a contemporaneous log — date, destination, purpose, miles.
- Keep records generally for at least three years from filing; longer in some circumstances, and employment tax records for at least four.
A phone, car or home office used for both business and personal purposes is deductible only to the extent of business use, and that proportion needs support. Claiming the full cost of something with obvious personal use is a common and avoidable error.
Doing it yourself, or not
Reasonable to handle yourself
- Low transaction volume
- No employees or payroll
- Straightforward cash-basis service business
- You will genuinely do it monthly
Worth paying for
- Payroll, inventory or multiple entities
- Accrual accounting requirements
- Sales tax across several jurisdictions
- You have not reconciled in three months
Bookkeeping and tax preparation are separable — many owners keep their own books and hand a clean file to an accountant at year end, which is usually the cheapest competent arrangement.
Questions owners ask
Is a spreadsheet good enough?
For a very simple business with few transactions, it can be. It stops being adequate once you need reconciliation, invoicing, payroll or sales tax, because the error rate climbs faster than the volume does.
How far behind is too far?
If you cannot say roughly what you earned and spent last month, you are too far behind to make decisions with. Catching up one quarter is an afternoon; catching up a year is a project.
What does my accountant actually need?
Reconciled books, bank and card statements for the year, loan documents, payroll reports, asset purchases, and a note of anything unusual. The cleaner the file, the lower the bill — most accountants charge more for fixing books than for using them.