Bookkeeping and accounting share two basic goals:
- to keep track of your income and expenses, thereby improving your chances of making a profit
- to collect the necessary financial information about your business to file your various tax returns and local tax registration papers
Sounds pretty simple, doesn't it? And it can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records. Hopefully you will also be reassured to know that there is no requirement that your records be kept in any particular way. (There is a requirement, however, that some businesses use a certain method of crediting their accounts. See " Cash vs. Accrual Accounting.") In other words, there's no official "right" way to organize your books. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable.
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 from your business.
- Summarize your income and expenditure records on some periodic basis (generally 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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