Bookkeeping for small business: a simple system for makers

Bookkeeping basics: what it is and what the IRS asks for

Bookkeeping for a small business is the habit of recording money in and money out, with proof for each entry. For a maker selling candles, prints or jewelry, that means a line for each sale, a line for each supply order and fee, and a folder of receipts that backs them up.

The IRS does not hand you a form for this. Its recordkeeping page says that, except in a few cases, the law does not require any special kind of records. What it does ask is that your books show your gross income, as well as your deductions and credits, and that you can prove what you claim. In its words: You must be able to prove certain elements of expenses to deduct them.

For most small businesses, the IRS notes that the business checking account is the main source for entries in the business books. That is why the first step in the system below is a separate bank account, and why the monthly check is against that account.

This page is general information about US federal recordkeeping, not tax or legal advice. State and city rules, such as sales tax records, vary, so check with your state revenue department or a tax professional for your situation.

How to do bookkeeping for a small business: the setup

This setup takes an afternoon. It works for a one-person shop selling on a marketplace, at markets, or from its own store.

1. Open a separate business account

   IRS Publication 583 says to keep your business account separate from your personal checking account, and to deposit all daily receipts in your business checking account. Pay every supply order and fee from this account too. A mixed account makes every monthly check harder, because personal spending has to be picked out first.

2. Pick single-entry or double-entry

   Single-entry is the simplest to maintain. Publication 583 describes it as A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. Double-entry uses journals and ledgers and has built-in checks and balances to assure accuracy and control.

3. Choose where the books live

   A spreadsheet, a paper ledger or accounting software all work. The IRS says All requirements that apply to hard copy books and records also apply to electronic records, so a digital system is held to the same standard as paper.

4. Decide on an accounting method

   You choose a method on your first return. Under the cash method, you report income in the tax year you receive it. Under an accrual method, you generally report income in the tax year you earn it. The cash method follows the bank account, which keeps a one-person shop's books simple.

5. Set up categories

   Use a short, fixed list: sales, refunds, materials, packaging, shipping, platform fees, payment processing fees, advertising, equipment and other. Fewer categories mean fewer mistakes, and a fixed list makes year-end totals easy to match to your tax return.

What to record for each sale and each purchase

Each entry is one row. The table shows the columns a maker needs and the proof to keep. The IRS lists supporting documents as sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks; for an online seller, order exports, payout reports and emailed receipts do the same job.

For makers, materials count as purchases. The IRS says that for a manufacturer or producer, purchases include the cost of all raw materials or parts purchased for manufacture into finished products. Keep those receipts with the same care as your sales records, because they reduce your taxable profit.

How to keep track of business expenses for taxes

An expense is only deductible if you can back it up. The IRS says your documents should identify the payee, the amount paid, proof of payment, the date incurred, plus a description showing the cost was for the business. A card statement alone shows the amount and the payee; the receipt shows what you bought.

Publication 583 says it is best to record transactions on a daily basis. A weekly habit is a workable middle ground for a small shop: once a week, enter the week's purchases, attach each receipt, and tag the category.

• Pay business costs from the business account or a card used only for the business.
• Photograph paper receipts the day you get them and file the image with the entry.
• Forward emailed receipts to one inbox or folder used only for the business.
• Write a note on any receipt that does not explain itself, such as what a hardware store purchase was for.
• If you drive for the business, keep mileage in its own log with the date, trip purpose and distance.

How to organize receipts for taxes

The IRS suggests you organize supporting documents by year and type of income or expense. In practice that is one folder per tax year, with a subfolder per category, whether the folders are paper or digital.

Name digital files so they sort on their own: the date, the supplier and the amount. A search for a supplier name then shows every receipt from them for the year. At year end, close the folder and start a new one; do not mix years.

Monthly reconciliation of marketplace payouts

Marketplaces pay you the sale minus their fees, often in batches. Your books need the full sale and the fees as separate lines, or your income will look smaller than what the platform reports. Do this once a month.

1. Download the payout and fee reports

   From each marketplace and payment processor, download the month's sales report, fee statement and list of payouts to your bank.

2. Record gross sales and fees separately

   Enter total sales as income and total fees as an expense. Example: if a month's sales were $1,200 and fees were $110, record both, and expect a payout total near $1,090 before refunds and reserves.

3. Match payouts to bank deposits

   Each payout in the report should appear as a deposit in the business account. Tick them off one by one. A missing deposit is usually a payout still in transit, a reserve held back, or a payout sent to the wrong account.

4. Match purchases to the bank statement

   Check every withdrawal on the statement against an entry in your books. Anything without an entry needs a receipt found and recorded, or a note explaining it.

5. Write down the month's totals

   Record the month's income, expenses and ending bank balance. These monthly summaries are the same totals Publication 583 describes for single-entry books, and they make the year-end tax return a matter of adding twelve rows.

Why your own records matter more than a payment form

Payment platforms send a Form 1099-K only above a threshold. The IRS says they are not required to file one unless payments to you exceeds $20,000 and the number of transactions exceeds 200. If no form arrives, the IRS reminds sellers that whether or not you receive a Form 1099-K, you must still report any income on your tax return.

Your own books are what show your income, fees and refunds. When a form does arrive, the monthly reconciliation above lets you match its payment total to the sales and fees in your books.

How long to keep business records

The IRS ties how long you keep a record to the period in which a return can be amended or reassessed. Its guidance for income tax returns sets these periods, counted from when you filed.

• In most cases, keep records for 3 years.
• Keep them for 6 years if you left out income of more than a quarter of the gross income on the return.
• Keep them for 7 years if you claim a bad debt deduction or a loss from worthless securities.
• Keep them indefinitely if you do not file a return.
• Keep employment tax records for at least 4 years, if you have employees.
• Keep records for equipment and other property until the period of limitations expires for the year in which you dispose of the property.

Keep copies of each filed tax return as well. Lenders, insurers or your state may ask you to keep some records longer than the IRS does.

Where Nation fits

Questions about bookkeeping for small business