Accounting or bookkeeping are a required part of a side gig. Whether you want to or not you will need an accounting system to record revenue and expenses. This is not an option but required by federal and state laws. There must be an effort to record all business transactions. There must be a way to differentiate between revenue and owners' investment and between expenses and owner's withdrawals. Correctly documenting transactions are so important especially if the businesses only accounting system is its checking account. Checking accounts sometimes are the only documents I have to prepare a schedule C or schedule E, so I must be able to figure out what is an owner's withdrawal and a legitimate expense. Recently, checking accounts are really debit card purchases which do not provide as much information as a check. So, when paying for something with a debit card please save the receipt either digitally or old school paper.
One upgrade from a simple business checking account as the accounting system is using a simple paper double entry accounting system. This is basically what we used before computers. All that is required is a journal and a collection of Ledgers.
First you take a business transaction and enter it into a Journal, this is called journalizing. All transactions are entered into the journal, usually in chronological order. An example of a journal entry would be sale of an item. The sale is entered on the credit side of the double entry system and cash is debited to ensure debit equal Credits. Then they are posted to the Cash ledger and the sale ledger usually at the end of the day. It is important to understand basic bookkeeping even though most people today do not journalize and post to Ledgers. We are now spoiled; we have accounting software.
Accounting software available today is very much more convenient than old school paper and pencil accounting system. What's out there today? Most of what I see is in the cloud subscription accounting software. The two I work with the most is QuickBooks and Xero accounting. You can simply login from any computer and access the system in the cloud, it's much better than downloading software on to your desktop and having to save a copy every time you log off. These online accounting systems are paid monthly and usually cost around $30.00 a month and they are definitely worth it. Basically, you connect the software to your bank feed and simply classify each transaction from the bank feed as it enters into the accounting system software. Once the bank feed is classified correctly, you are ready to print out a profit and loss for your Tax return or loan application. The only part of this process that is slightly complex is the quarterly or yearly adjustments. An example is depreciation, this is normally entered as a journal entry which all accounting software provides. Example would be an automobile 6000 pounds or less is depreciated over a 5 year and usually as much as $20,400 is depreciated in the first year using bonus and section 179 with the rest depreciated over the next four years.
In practice we take the reports from the various accounting software and convert it to an excel spread so we can tweek it for either a financial statement or for filing end of year tax returns. Usually, you can take the spreadsheet and modify it so that expenses match up with the 1040 schedule C or the 1040 schedule E. You should be thinking about estimated taxes monthly or at least quarterly, so I prepare a projected profit and loss every month. I multiply it by 12 to give me an idea of my yearly taxable income so my estimated taxes are as accurate as possible. If you have any tax or accounting questions please call me at 951-326-0944 Ray Wellman EA
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