helps you determine whether you are making or losing money, but it also helps you track inventory, prepare financial statements, create a budget, secure a bank loan or venture capital financing, devise a tax-planning strategy, determine your tax liabilities and complete income tax returns.
The simplest way to keep track of your expenditures and inventory is to keep a journal where you can record cash transactions, sales and revenue transactions, accounts receivable/payable and record adjusting and closing entries at the end of an accounting period. After a transaction is made, it should be listed in your journal. At the end of an accounting period (usually a month, a quarter or a year), all entries are transferred to a ledger-a collection of the balance sheet, income and expense accounts you used to keep track of your accounting records. If done accurately, your debits should equal your credits. Once the ledger balances, the information it contains is used to prepare financial statements.
As a former auditor with Arthur Anderson’s Enterprise Group in New York City, Louis Eustache was able to see firsthand the financial difficulties faced by small and mid-size companies. When he and his partner, Allan Rembaran, launched Account On Us Services, a Manhattan-based accounting outsourcing firm in 1997 with $50,000 in personal savings, he made keeping adequate cash reserves a priority.
“We made sure the rent and payroll were covered,” says Eustache, 30. “Our me
ntality was to pay everything in cash.” Today the firm’s revenues are $375,000.
To avoid the trap of mingling business and personal funds, keep separate accounts. If you use a personal credit card to buy office supplies, immediately write yourself a check on your business or pay yourself from petty cash, noting the category in which the money was used for tax purposes. If you find it necessary to withdraw funds from your business for personal reasons, enter the amount you took in your ledger and write a personal check to your business to repay the loan. Also, separate receipts when making personal and business purchases and store them in different locations, especially if you work at home.
If you want an automated system set up to record more extensive information or want to create and tailor your journal to your firm’s specific needs, try accounting software programs such as QuickBooks Pro (Intuit; www.quickbooks.com) or Peachtree Accounting (Peachtree Software; www.peachtree.com), where you can input information such as sale price and number of items sold. Both programs retail for under $200.
An accountant or CPA can also assist with routine tasks such as preparing financial statements or adjusting and closing book entries, but be prepared to pay from $10 to $100 per hour in fees. Ask associates or friends for referrals.
EASE YOUR TAX BURDEN
As a self-employed business owner, filing as a sole proprietorship (a business that has a single owner) can simplify tax matters, says Chad Piehl, a licensed stock broker and CPA partner in Hetchinson, Minnesota.
Indeed, sole proprietorships are considered nontaxable entities, which means that business and assets and personal liabilities