Friday, February 8, 2013
Making Book on Your Business
Most people think bookkeeping is only for tax purposes. True, keeping good records certainly will help you at tax time, whether you do your own taxes or have someone else do them for you. But record keeping has other advantages. It can tell you where you’ve been and perhaps where you’re going. It gives you a heads up when things aren’t going as well and let’s you know when to breathe a sign of relief when they’re going better.
If you don’t keep good records, you’re allowing forces other than yourself to run your business. For one thing, whether your freelance operation shows real profit or not will he evident in well-documented books. Losses won't hit you as hard since they’ll appear in time for you to make needed alterations in your work habits or markets. On the positive side, if your income is growing, you might he edging toward a higher income-tax bracket. By noting this possibility early, you'll be in a better position to make the decisions that will save money and offset your tax liability.
How you keep control of the financial end of your business is totally up to you. You decide whether you want it to be easy or a constant headache. But it doesn't have to be the latter. Much depends on how you lay out your initial plans and how willing you are to diligently record the necessary information. Whatever system of keeping track you choose, you'll want it to he simple to use, easy to understand, reliable, accurate, consistent, and designed to provide information on a timely basis. The IRS doesn’t require any particular accounting system. All it requires is that you keep track of income and expenses.
Today, you have many digital accounting programs, both independent and online, to choose from. In most cases, these are meant for larger businesses. You want to keep things simple—at least in the beginning. You’ll need nothing more than a simple record hook using a single-entry system of recording expenses and income. You can pick one up at your local office supply store.
If you’re more inclined to work digitally, you could create a simple spreadsheet or multiple ones showing the necessary information. Whatever system you decide to use, you want to make sure it allows for expansion and ease of input.
One thing you’ll have to learn to do is a profit and loss statement. This should be done at the end of each year. Such a statement not only helps you see where you’ve been, but can also help if you need to get a loan as most lending institutions require one. There’s no special form. Just list all the money you took in and the expenses you paid out in various categories. By employing the expense categories set up by the IRS on Schedule C, you can just transfer those amounts to your statement. The difference between what you earned and what you spent is your profit or loss. This may or may not be the same as the total on your Schedule C of your tax return as there are other items involved on it.
A record of furniture, fixtures, and equipment in a separate section of the same record book will be an added convenience when, at tax time, or perhaps during any problems dealing with an insurance company, you need to see quickly what you purchased, from whom, when, and for how much. With all of this together you can then also record by which means of depreciation you are operating—another bit of information the IRS requires of businesses. All equipment needs to be depreciated according to IRS rules.
You can also keep a record of payments to your retirement fund, your savings account, insurance payments, dividends received, receipts from medical and disability insurance, details on payments and subcontracts, accounts receivable and payable, loans, leases, etc. Only your own particular situation and your accounting preference will dictate what is or isn’t included. Generally, as a freelancer, you don't have to be concerned about most of these details but, if and when you do, the same record book is expandable to include them and you have, as near as is possible, a complete financial accounting of your situation in one handy book.
NEXT WEEK: Some bookkeeping tips to make your life a little easier.