Starting Your Small Business Books: 10 Things to Do in Month One

Small business bookkeeping setup guide by Robert Allen Bautista, Kansas City accountantMost new business owners put off bookkeeping until tax season, and that is when it hurts. Cleaning up twelve months of mixed-up receipts is slow and expensive. Setting things up in the first month takes a few hours and saves you far more. Here are ten steps in a sensible order.

1. Open a separate business bank account

Do this first. Mixing business and personal money is the most common bookkeeping mistake, and it makes everything harder: figuring out profit, claiming deductions, and showing a lender or tax authority that your records are reliable. Depending on how your business is set up, you may need your entity paperwork and an EIN to open the account.

2. Get an EIN if you need one

An Employer Identification Number is free from the IRS and identifies your business. Sole proprietors without employees can sometimes use their Social Security number, but many owners prefer an EIN to avoid handing out an SSN to clients and banks. Never pay a website to get you one; the IRS provides it at no cost.

3. Pick an accounting method

Most small businesses use cash-basis accounting: you record income when you receive it and expenses when you pay them. Accrual accounting records income when earned and expenses when incurred. Cash basis is simpler and works for many small businesses, though some situations, such as holding inventory or having larger revenue, may call for accrual. Choose one and stay consistent.

4. Choose bookkeeping software

You do not need a spreadsheet maze. Cloud accounting software can connect to your bank, categorize transactions, and produce reports. Pick one that fits your budget and that your accountant or bookkeeper can access. A spreadsheet can work for a very simple side business, but software tends to scale better.

5. Set up a simple chart of accounts

The chart of accounts is the list of categories your money flows through: income, cost of goods sold, and expenses like software, advertising, insurance, supplies, and professional fees. Keep it short at first. Twenty to thirty well-chosen categories are plenty. Mirror the categories on the tax form your business uses so that year-end is easier.

6. Connect your accounts and build a habit

Link your business bank account and business credit card to the software so transactions flow in automatically. Then set a recurring time, for example thirty minutes every Friday, to review and categorize. Small weekly sessions beat marathon cleanups every time.

7. Decide how you will capture receipts

Pick one system and use it every time. Snap a photo of each receipt with an app, forward email receipts to a dedicated folder, and keep a cloud folder organized by month. Receipts support your deductions if anyone ever asks questions. For larger or unusual purchases, jot down the business purpose on the receipt.

8. Plan for taxes from the start

If you are a sole proprietor, partner, or single-member owner, no one is withholding income or self-employment tax for you. Set up a separate savings account and move a set percentage of each payment into it. Many new owners begin with 25 to 30 percent of profit and refine it later. Learn the quarterly estimated tax due dates: April 15, June 15, September 15, and January 15. If you have employees, you will also have payroll tax deposits and filings, which are less forgiving than income tax.

If you collect sales tax in Missouri or Kansas, register with the state revenue department, track what you collect, and file on schedule. Check with the state before you make your first taxable sale.

9. Set up how you pay yourself

How you pay yourself depends on your entity type. A sole proprietor or single-member LLC owner usually takes owner draws, which are transfers from the business to personal and are not expenses. An S corporation owner who works in the business must run payroll and pay a reasonable salary. Do not pay personal expenses from the business account and call them business costs. Keep the line clean, and your books will be accurate.

10. Create a monthly close routine

At month end, run through a short checklist:

  • Reconcile your bank and credit card accounts so the software matches the statements.
  • Review uncategorized transactions.
  • Send out or follow up on unpaid invoices.
  • Look at a profit and loss report to see how the month went.
  • Save a copy of the reports.

A monthly close takes less time than you think once it becomes routine, and it gives you real numbers to guide decisions rather than guesses.

When to ask for help

Setup mistakes are cheap to fix in month one and costly to fix in month twelve. A one-time setup session with an accountant or bookkeeper can be a good investment, especially for choosing categories, deciding how to pay yourself, and planning for taxes.

Bottom line

Separate account, simple software, a short chart of accounts, a weekly habit, a tax savings account, and a monthly close. That is the whole system. It is not glamorous, but it is the foundation of a business you actually understand.

This article is general information, not tax advice for your specific situation.

Related: Quarterly estimated taxes and the safe harbor. Robert Allen Bautista, independent tax preparer and accountant, Kansas City. robertallenbautista.wixsite.com/taxpro

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