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What is Bookkeeping?

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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.

Who Files a Schedule C?

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Self employed people file a Schedule C. It is a form that is added to your 1040. The Schedule C is used to report any income you made from being self employed. (Click here for a detailed description of Schedule C.)

Here is a list of some of the jobs that use a Schedule C most often:

  • Hair Stylists
  • Uber / Lyft Drivers
  • People with Airbnb rentals
  • A person with a lawn care business
  • Independent contractors
  • Amazon affiliate sellers
  • Anyone that gets a 1099-MISC or 1099-NEC
  • Painters
  • Writers
  • Any small business with no employees

If you work for yourself and set your own hours, you can probably use a Schedule C to file your taxes.

What is a Schedule C? (Parts III, IV, V)

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Page 2 of the Schedule C form has parts III, IV, and V. These sections are also used for expenses.

Part III

Part III of Schedule C is used to report the cost of goods sold for businesses that sell products. This section includes the following lines:

  • Line 32: Beginning inventory
  • Line 33: Cost of goods purchased
  • Line 34: Cost of labor
  • Line 35: Cost of materials and supplies
  • Line 36: Other costs
  • Line 37: Ending inventory

The total of these lines is subtracted from the gross receipts on line 1 to calculate the cost of goods sold. This number is then used to calculate the gross profit on line 4.

Part III of Schedule C is important because it helps to accurately determine the profitability of a business. By tracking the cost of goods sold, businesses can identify areas where they can reduce costs and improve their bottom line.

Part IV

Part IV of Schedule C is used to report information about the use of a vehicle for business purposes. If you use your personal vehicle for business, you can deduct certain expenses related to its use, such as gas, oil, and repairs. However, you must keep accurate records of your mileage and expenses in order to claim these deductions.

To report your vehicle expenses on Schedule C, you will need to provide the following information:

  • The make, model, and year of your vehicle
  • The date you acquired the vehicle
  • The vehicle’s odometer reading at the beginning and end of the year
  • The total miles you drove the vehicle for business purposes
  • The total expenses you incurred for the vehicle, such as gas, oil, repairs, and insurance

You can claim the standard mileage rate for your vehicle expenses, or you can deduct the actual expenses you incurred. The standard mileage rate for 2023 is $0.585 per mile. If you choose to deduct the actual expenses, you will need to keep receipts for all of your expenses.

Part 4 of Schedule C is an important part of your tax return if you use your personal vehicle for business purposes. By accurately reporting your vehicle expenses, you can reduce your taxable income and save money on taxes.

Part V

Part 5 of Schedule C is used to report any other expenses that are not listed in Parts 1-4. This could include expenses such as office supplies, professional fees, or travel expenses. The total of these expenses is entered on line 27a.

The expenses reported on Part V are usually items that don’t fit into an of the categories already listed on the form in part II. You can use this section to enter expenses you have that are specific to your business. If you are a hair stylist you might put the amount you paid for clippers and scissors here. A restaurant/bar could put CO2 purchases here.