How to catch up with your bookkeeping
If bookkeeping for your business has fallen by the wayside, there’s never a better time to catch up on it than right now – especially if it’s tax season. If your bookkeeping records aren’t in order, you risk running up against errors or other common audit triggers for the IRS. When you actually undergo the auditing process, your lack of proper bookkeeping could open your finances up to further scrutiny, penalties, and fees.
Don’t worry – we’re not trying to frighten you. The chances of actually getting audited by the IRS are actually fairly low, but that won’t be much consolation should it happen to you. So, why risk it?
If the IRS isn’t your concern, making sure your business is running efficiently should be. Having good financial records in place can help you assess and adapt your business strategy to capture more income. Learning how to read financial statements and analyze them can be very helpful when it’s time to make decisions.
Think it’s too late to play catch-up bookkeeping? It’s not, and it may only take a day of your dedicated time to have everything sorted out.
What is bookkeeping?
Bookkeeping, simply put, is the process of recording all financial transactions made by your business. This can include everything from income and expenses to invoices and receipts. All businesses should practice bookkeeping, regardless of their size or industry.
While you may be tempted to just stuff everything into a box and forget about it until tax season comes around, this is a huge mistake. Not only will it make your taxes more complicated (and possibly trigger an audit), but you also won’t have a good handle on how your business is actually performing.
Tedious? Yes. Important? Also, Yes.
The bookkeeping process is a tedious job, especially when you are playing catch-up. However, recording financial transactions and having accurate financial data is crucial to running an efficient business. Bookkeeping gives you the ability to track your spending, assess your income, and make better financial decisions for your business. It’s an essential part of running a successful business, and it’s something you should be doing on a regular basis – not just once a year.
The double-entry system
If you’re behind on your bookkeeping, don’t worry – you can catch up using the double-entry bookkeeping system. This system is used by businesses all over the world to record financial transactions, and it’s easy to learn.
Here’s how it works:
Every time a financial transaction occurs, it is recorded in two places. For example, if you receive cash from a customer, you would record the transaction in the “cash” account and the “revenue” account.
This may seem confusing at first, but it’s actually quite simple. This is simply a set of rules for recording financial information in a financial accounting system. Double-entry bookkeeping ensures that every financial transaction is accounted for, so you can be confident that your books are accurate. This way when you are asked to produce financial statements, you know everything is accounted for.
How can I get started catching up on my bookkeeping?
Now that you understand the importance of bookkeeping and the basics of how it works, it’s time to get started.
If you’re starting to feel overwhelmed, don’t worry. We’ve put together a simple guide to help you catch up with your bookkeeping and get your financial records in order.
Gather receipts & invoices
Before you do anything, find out how far behind you are in your bookkeeping. You may be just a couple or even several months behind, but either way, it’s important to know (and be honest with yourself about) how far back into the past you’re going to have to begin.
Once you’ve identified the period of time that you need to construct your records, start by gathering all of your receipts and invoices. This goes beyond the traditional “paper” tracking of financial transactions. With online banking and payments, it is important to check both digital and paper trails to ensure an accurate recount of ALL financial transactions.
Sounds simple, right? It might be if you know where all of these things are. To clarify, you’re looking for:
- Invoices to Customers – If you send your customers invoices, you probably have them saved somewhere on your computer or have physical copies in a dedicated folder. If you don’t have a method for saving these, we suggest setting one up as soon as possible. If you do have old invoices, but they’re not saved in an easily accessible format or location, now is the time to change that.
- Records of Bad Debt – Someone might owe you money, and you haven’t been able to collect on their debt to you. This is known as bad debt and keeping accurate records of it can allow you to factor it into your tax return.
- Business Expenses – It takes money to make money, which is why businesses can deduct their expenses from their taxes. Make sure you account for all receipts related to expenses you intend to deduct, so you can get an accurate reading of your income tax liability. An expense account can also include payments such as wages and salaries.
- Accounts Payable – This includes anything that a business owns to its suppliers. Accounts payable can include its suppliers, credit cards, and bank loans.
- Income Statement – This can include accounts receivable, balance sheet, cash flow statement, and income statement to reflect any money earned. On financial statements, minor differences between accounts receivable and income statements can be tricky. It is important when bookkeeping, to track everything.
Keep ’em separated
If you’re a sole proprietor, you might find it difficult to separate your personal and business expenses when bookkeeping. Unfortunately, the IRS requires that you do this – they aren’t interested in subsidizing your lifestyle choices.
The best way to keep track of everything is by using a dedicated business credit card for all of your business purchases. This will make it much easier to track expenses come tax time, and you can even set up automatic payments to ensure you never miss a due date.
If you don’t want to open a new line of credit, that’s understandable. In this case, we recommend using a separate checking account for your business. This will
also make it much easier to keep track of your expenses, and you can simply transfer money from your personal account to your business account as needed.
Reconcile your bank statements
Review your bank records to make sure the income and expenses you identified agree with what’s gone into and out of your accounts. If your records don’t match what’s showing up on your bank statements, it’s likely an indicator that there’s a mission invoice or receipt somewhere.
Being able to identify when and possibly to whom payment was sent or received can help you track down and fill in gaps during your catch-up bookkeeping endeavor.
Make sure business & personal expenses aren’t mingling
As previously mentioned, it can be hard to track financial transactions when your bookkeeping overlaps with your personal finances. It’s more than likely that you have a separate bank account you use for your business, but sometimes independent contractors find it easier to have their assets flowing in and out of one account. If this is the case for you, at least make sure you can accurately identify business and personal expenses in your bank statements.
Avoid an IRS tax audit
Claiming personal expenses as business expenses is a common trigger for IRS audits that can lead to harsh penalties or worse if egregious enough. Consider opening a small business bank account to avoid these two very different types of expenses from being confused with one another as you play catch-up bookkeeping.
When is it time to hire someone?
If you find that you’re really struggling to keep track of everything, you might want to consider hiring a bookkeeper or accountant. This will be an extra expense, but
it could save you a lot of headaches (and money) in the long run. A bookkeeper is someone who is skilled at keeping documents and tracking a wide net of financial information. Working with a tax professional can save a lot of headaches and also protect your business from any mistakes that can be costly.
Digitize & organize all of your records
If not all of your records are already in digital form, scanning them is an important step to preserving them for future reference. The IRS has its own guidelines for how long you should hold on to your records, but by digitizing everything, you can hold on to them all indefinitely.
You shouldn’t rely on digital copies, however. It may be a good practice to just hold on to your tax returns and receipts for the maximum recommended amount of time (seven years). After that, you can shred your oldest files every year with the assurance that they still exist in a digital form.
File Your W-9s, 1099s, & W2s
Unless you’re a sole proprietor or independent contract with no employees or subcontractors, you’ll need to file important tax documents.
These documents include:
You’ll need to provide a W-9 form to any contractor you paid $600 or more during the year. The IRS uses this information to track how much money you paid out to contractors as well as how much tax they owe on that income.
You must provide a 1099 form to any contractor you paid $600 or more during the year. The contractor will use this information to file their taxes.
W2 forms are for employees and show how much money they made during the year as well as how much was withheld for taxes.
You can get away with not filing 1099s and W2s if you don’t have any employees or contractors, but the IRS may come after you if they catch wind that you should have been filing them.
File your business taxes
If you haven’t already filed your business taxes, that should be your top priority. Depending on the type of business you have, you may need to file quarterly or annual taxes.
If you’re not sure how to file your taxes, there are a number of resources available to help, including the Small Business Administration and the Internal Revenue Service.
Here’s what you need to know:
- Independent Contractors: If you paid someone more than $600 for work during the last tax year, you’ll need to file a Form W-9 and a Form 1099-MISC. The former will request the worker’s taxpayer information, which you’ll use to fill out a 1099-MISC for the IRS. The 1099-MISC is used by the tax agency to account for payments to independent contractions.
- Employees: If someone is employed by you, you’ll need to file a W-2. This wage and tax statement outlines the employee’s gross income and deductions for local, state, and federal taxes.
Have a tax attorney review your work
If you’re undergoing a catch-up bookkeeping process, having an experienced tax attorney walk you through the process or review your work can help you protect yourself from an audit. At Damiens Law Firm, PLLC, we’re dedicated to supporting people through their tax-related problems and can help you prevent them by reconstructing your business’ financial records.
If you’re behind on your bookkeeping or haven’t made an effort to get organized, Damiens Law Firm, PLLC can advise you of best practices that can help you work through the details of your situation. We’re committed to helping people, just like you, file with confidence by knowing they have a legal tax representative on your side.
For more information about how Damiens Law Firm, PLLC can help you, contact us online or call (601) 957-9672 and ask about scheduling a free initial consultation.