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What is Bookkeeping?

In simple terms, bookkeeping is organizing financial the financial transactions that occur in a business.  This includes purchases, sales, receipts, bank deposits and payments by an individual or organization. Here’s a breakdown of the key aspects:

  • Recording Transactions: Every sale, purchase, payment, or receipt of money is recorded. This is done in journals or ledgers, which are essentially detailed logs where each transaction is entered with a date, description, and amount.
  • Categorizing: Transactions are classified into relevant accounts. For instance, sales go into an income account, rent goes into a rent expense account, etc. This categorization helps in understanding where money is coming from and where it’s going.

Why is Bookkeeping Important?

  • Financial Health: It provides a clear picture of the financial health of a business, showing profitability, cash flow, and financial trends over time.
  • Legal Compliance: Accurate bookkeeping is essential for tax purposes. It ensures that businesses can comply with tax laws, file accurate returns, and avoid penalties.
  • Decision Making: With precise financial data, business owners and managers can make informed decisions, from daily operations to strategic planning.

Bookkeeping for a small business or sole proprietor

A bookkeeping system for a micro business or a sole proprietor should be simple yet effective, ensuring that all financial transactions are recorded accurately while being easy to manage. The first step is choosing a method. There are three basic methods for bookkeeping:

  • Manual Bookkeeping: Use a simple ledger book or notebook. This is cost-effective but can be time-consuming and prone to human error.
  • Spreadsheet Software: Tools like Microsoft Excel or Google Sheets are accessible, flexible, and allow for basic calculations and data organization.
  • Bookkeeping Software: Options like QuickBooks, Wave, or FreshBooks are tailored for small businesses, offering automation, invoicing, and basic financial reporting. Many have free or low-cost versions suitable for small businesses.

Which method should you choose?

For someone just starting a business, simple is usually better. You will be busy working on your business and won’t have a lot of time to spend on bookkeeping. Manual bookkeeping is the simplest but also takes up a lot of time. Bookkeeping software is the most complicated and takes a lot of time to maintain. It’s my opinion that a basic spreadsheet system is the simplest and easiest bookkeeping method for someone just starting out or someone with a micro business that doesn’t have invoicing or employees.

Writing stuff down in a notebook doesn’t require any explanation and bookkeeping software requires full tutorials to use that I don’t have the space for here, I’m going to focus on using Spreadsheets.

Pros of using spreadsheets for bookkeeping

  • Cost effective:
    • Google Sheets is free with a Google account. A subscription to Microsoft Office that includes Excel is $6.99 a month or $69.99 a year.
  • Accessibility:
    • Being cloud-based, you can access your financial data from any device with internet access. Work remotely from anywhere.
  • Customization:
    • You have complete control over the set-up and layout of your spreadsheets. You can customize them to fit your exact bookkeeping needs.
  • Integration:
    • Google Sheets integrates with other Google services like Google Drive and Excel integrates with the other Microsoft Office products. Both also have add-ons that can enhance functionality.
  • Backup and Recovery:
    • Automatic saving and the ability to revert to previous versions provide some security against data loss.
  • Automatic Updates:
    • Google and Microsoft regularly update the applications, adding new features or improving existing ones at no cost to you.

Cons of using Spreadsheets for bookkeeping

  • Limited Automation:
    • Spreadsheets don’t automatically import and categorize transactions. This is where www.nobookkeeping.com can help!
  • Scalability:
    • Spreadsheets can get you started, but if your business really takes off in a year or two, you will probably need some accounting software or professional help.
  • Compliance:
    • Spreadsheets won’t offer any tips on tax laws or accounting standards.
  • No Sophisticated Reporting:
    • The spreadsheet is the report.

For many small businesses or sole proprietors, spreadsheets can be an excellent starting point for bookkeeping, particularly when funds are limited, and the business operations are simple. However, as the business grows or transactions become more complex, you might find the need to transition to more specialized bookkeeping software or consider hiring a professional accountant. Remember, the key is maintaining accurate, organized records regardless of the tool used.

Taxpayer Advocate Identifies Top 10 Problems with Agency

National Taxpayer Advocate Erin M. Collins released her 2023 Annual Report to Congress on January 10. The report credits the Internal Revenue Service with improving taxpayer services and developing plans to transform the taxpayer experience, but it identifies paper processing as an area of continuing weakness.

Taxpayer Service Challenges

Extraordinary delays in assisting victims of identity theft. At the end of fiscal year (FY) 2023, nearly half a million taxpayers with cases pending in the IRS’s Identity Theft Victims Assistance (IDTVA) unit were waiting an average of almost 19 months for the agency to resolve their identity theft problems.

Delays in processing amended tax returns and taxpayer correspondence. Despite the IRS’s success in eliminating its backlog of paper-filed Forms 1040, backlogs in processing amended individual income tax returns (Forms 1040-X), amended business tax returns and correspondence continued. 

Challenges in receiving telephone assistance despite overall improvements. The report says the IRS deserves credit for achieving its goal of providing an 85% Level of Service on its AM telephone lines during the filing season, but it points out that the LOS is a highly technical measure that excludes the majority of calls the IRS receives from its calculation. During the same period that the IRS achieved an LOS of 85%, IRS employees answered only 35% of all calls received. For the full fiscal year, IRS employees answered 29% of all calls received.

Employee Retention Credit (ERC) processing. Employers who file eligible ERC claims are often waiting six months or longer to receive their credits or refunds. TAS has received several thousand ERC cases, and some have involved non-profit organizations that provide medical or other critical services and are depending on ERC refunds to stay afloat. As of early December, the IRS had a backlog of approximately one million ERC claims. The IRS has said many of the submitted claims are fraudulent or otherwise non-qualifying.

The report acknowledges the IRS is between a rock and a hard place in handling ERC claims. “If it pays claims quickly without adequate review, it could pay billions of dollars to nonqualifying persons. If it takes the time to review claims carefully, eligible employers will experience significant delays in receiving the credit, and in extreme cases, employers who need the funds immediately could go out of business,” the report says.

Administrative recommendations

1. Prioritize the improvement of online accounts for individual taxpayers, business taxpayers and tax professionals to provide functionality comparable to that of private financial institutions.

2. Improve the IRS’s ability to attract, hire and retain qualified employees.

3. Ensure all IRS employees – particularly customer-facing employees – are well-trained.

4. Upgrade the back end of the “Document Upload Tool” (DUT) to fully automate the processing of taxpayer correspondence. 

5. Enable all taxpayers to e-file their federal tax returns.

6. Extend eligibility for first-time penalty abatement to all international information return penalties. 

January 29 is the Official Start of Tax Season

The IRS will begin accepting and processing tax returns on Monday, January 29, 2024

The IRS will not officially begin accepting and processing tax returns until Jan. 29, people do not need to wait until then to work on their taxes. Most software companies accept electronic submissions and then hold them until the IRS is ready to begin processing later this month. IRS Free File will also be available on IRS.gov starting Jan. 12 in advance of the filing season opening. The IRS Direct File pilot will be rolled out in phases as final testing is completed and is expected to be widely available in mid-March to eligible taxpayers in the participating states.

Internal Revenue Service has been making some changes to help simplify the process of preparing and filing tax returns. A lot of these changes are the result of the Inflation Reduction Act and they include:

  • Expanded in-person service that meets taxpayers where they are by opening or reopening Taxpayer Assistance Centers (TACs). The IRS will also offer extended hours at many TACs nationwide.
  • Increased help available on the toll-free line and an expanded customer call back feature designed to significantly reduce wait times.
  • Improvements to the Where’s My Refund? tool, which is the IRS’ most widely used taxpayer service tool. However, the tool provides limited information, often leading taxpayers to call the IRS to inquire about their refund status. Updates to Where’s My Refund? will allow taxpayers to see more detailed refund status messages in plain language. These updates will also ensure Where’s My Refund works seamlessly on mobile devices. Taxpayers often see a generic message stating that their returns are still being processed and to check back later. With the improvements, taxpayers will see clearer and more detailed updates, including whether the IRS needs them to respond to a letter requesting additional information. The new updates will reduce the need for taxpayers to call the IRS for answers to basic questions. 
  • Enhanced paperless processing that will enable taxpayers to submit all correspondence, non-tax forms, and responses to notices digitally and will be able to e-File 20 additional tax forms. Achieving this milestone will enable up to 125 million paper documents to be submitted digitally per year.
  • An enhanced IRS Individual Online Account that includes chat, the option to schedule and cancel future payments, revise payment plans and validate and save bank accounts.
  • A new, pilot tax filing service called Direct File that gives eligible taxpayers a new choice to file their 2023 federal tax returns online, for free, directly with the IRS. It will be rolled out in phases and is expected to be widely available in mid-March. Find more about Direct File pilot eligibility, scope and the participating states on Direct File.

April 15th is Still the Deadline

April 15th is still the deadline for filing with the exception of people living in Maine and Massachusetts. Those taxpayers have until April 17 due to the Patriot’s Day and Emancipation Day holidays.