All businesses should have some kind of bookkeeping system. If your company is not going to borrow any money, you do not have to pay to have quarterly or annual statements prepared but you will need a bookkeeping system that will allow you or a bookkeeper to prepare you taxes. Many companies use their checkbook as their bookkeeping system.
Whether you use a professional bookkeeper or prepare your books yourself you must have a method of keeping track of your finances. The exact information you track will vary with your type of business. In general, any business should keep a record of the following information (when applicable):
Cash received in payment
Equipment owned or leased
The figures from these records, as well as others, will be used to produce your financial statements. These statements may be prepared by a CPA, or someone else knowledgeable in “Generally Accepted Accounting Practices” (GAAP). The consistency of these accounting practices allows you, your banker and accountant to all interpret your financial statements with a clear understanding of what is being show on them. There are two basic statements in a financial report:
A balance sheet shows what the business owns (assets) and owes (liabilities) at a particular point in time. It may also be viewed as the statement which shows the sources of funds (liabilities and equity) and the uses of those funds (assets).
Profit and Loss Statement
The profit and loss or income statement shows the flow of income of the business relative to its expenses for a given period of time. These statements can be prepared monthly, quarterly, or annually depending on your needs.
TIP – As stated in our article on setting up a commercial checking account, your checking account can double as your basic bookkeeping system for use during the year. Make sure everything you spend or make goes through your checking account. Make good notes about your deposits and expenses. If you purchase equipment, make a note of the type of equipment purchased, as well as, the price. At the end of the year when taxes are ready to be calculated you can either do them yourself or give your checkbook to a bookkeeper and they can do your tax returns for you. Many small businesses need only a fully documented checkbook and an annual tax return. The tax return serves as the income statement and the balance sheet.