Bookkeeping that helps you run the business

Written by

Certified Public Accountant, Texas; former IRS professional

What useful bookkeeping should tell you

Bookkeeping is the consistent recording and classification of a business’s financial transactions. Tax preparation is one use of those records, but current books should also help an owner answer practical questions: How much cash is available? Which customers still owe us? What bills and tax deposits are due? Is gross margin changing? Can the business afford a hire, distribution, or equipment payment?

A profit-and-loss statement shows activity over a period; a balance sheet shows what the business owns, owes, and has accumulated at a point in time. Neither is reliable when bank activity is unreconciled, loans are posted as income, personal expenses are mixed with business costs, or old receivables remain on the books after they are no longer collectible.

Build a monthly close that someone can repeat

A practical monthly close begins with complete source records. Import or record bank and credit-card activity, customer invoices and receipts, vendor bills, payroll, debt payments, owner contributions, and distributions. Reconcile every cash and credit account to the outside statement, investigate differences, and retain the documents that explain unusual or material entries.

Then review the reports rather than simply generating them. Compare revenue and major expenses with the prior month, the same month last year, and the operating plan. Scan accounts receivable and payable by age. Confirm that loan balances agree with lender statements and that payroll and sales-tax liabilities reflect amounts still due. Close or lock the period after corrections so later edits do not silently change reports that were already used.

Use controls that fit the size of the business

Even a small company benefits from basic separation and review. The person who approves a vendor should not be the only person able to create that vendor and release payment. Bank changes from customers or vendors should be verified through a known contact method. Owners should review bank reconciliations, payroll changes, new vendors, unusual journal entries, and payments above a sensible threshold.

When one employee must perform several roles, compensating controls matter. An owner can review bank statements directly, receive alerts for large transfers, require supporting documents with approvals, and have an outside accountant review the close. The goal is not bureaucracy; it is making errors and unauthorized transactions easier to prevent or detect.

Keep records with tax and decision deadlines in mind

The IRS says a business may use any recordkeeping system that clearly shows income and expenses, and supporting documents should be kept for as long as they may be needed under the applicable limitation period. Employment-tax records generally have a specific four-year federal retention rule. Other legal, lender, insurance, or state requirements may call for longer retention.

A good process does not need to be complicated. It needs a clear owner, a repeatable schedule, documented review, and a path for resolving questions. When the books close promptly each month, tax planning and business decisions can use current information instead of a reconstruction performed after the opportunity to act has passed.

Primary sources

• IRS Publication 583: Starting a Business and Keeping Records
• IRS: How long should I keep records?
• IRS: Employment tax recordkeeping

This article provides general educational information, not individualized tax, legal, or investment advice.