All new business owners must make it a priority to open a new bank account for their business, preferably an account with online access, to keep business funds separate from personal funds.
Processing transactions for your personal expenses within the bookkeeping of your business is a waste of precious time.
It’s even worse if you are outsourcing and paying a bookkeeper to process your accounts with these personal expenses mixed in…
… And they will have to be processed if they are mixed up with the business transactions. They have to be entered into the bookkeeping system and coded to drawings, taking up precious time that the bookkeeper could just spend entering business data.
If you need to use business money for personal expenses, just do a bulk transfer to your personal account on a regular basis like once a week so that the bookkeeper isn't having to deal with a million small personal transactions and making you pay for their time.
Also, open a business savings account and set aside money from your business earnings every month to pay your quarterly tax. Calculate a percentage (25-30%) of your Income and transfer it over before you spend it. Maybe do it the minute your customer pays you.
Online Bank Accounts
Bank accounts with online accessibility is definitely the way to go now. It is quicker and easier to login online to make payments and keep up with the bank reconciliations in your bookkeeping software, than to wait for the bank to post a statement, or writing out checks/cheques to make payments.
Small Business Bookkeeping Tips #2
Business vs Personal Expenses |Money
Drawings (Personal Expenses)
A sole trader or proprietor will most likely withdraw funds from the business account for personal use (drawings). This can be done in place of paying themselves a salary (but check with your Accountant first).
A good practice is to transfer one amount on a regular basis, such as once a week, from the business account into the personal account. The personal account is then used to buy the groceries, books, toys etc.
The business account can remain nice and tidy with only business transactions and the one regular drawing amount. This will also avoid the temptation to allocate a private expense to the business.
A business owner needs to know and recognize what type of expenses can be claimed (to reduce tax), and what can’t be.
- An expense that is directly related to the operation of the business and towards producing income is usually tax deductible.
- An expense that is for the owner’s personal pleasure is not.
- Mixing personal and business does not mean a full claim for business can be made. This includes taking a client out for lunch or buying them gifts.
If in doubt about whether or not to claim an expense, contact your accountant or tax department.
Sometimes the owner will use their personal funds for business purchases. These can and should be brought into the business bookkeeping system through bookkeeping journals so that all the expenses are being claimed and so reducing the amount of tax to pay at the end of the year. Don't forget to let your bookkeeper know about these expenses and keep all the receipts and invoices for them.
Small Business Bookkeeping Tips #3
Best Bookkeeping Software and Other Programs
The type of bookkeeping software you get will depend on what you need out of it.
Many software providers offer different levels, here are some examples:-
- Ledger and Cashbook
- Ledger, Cashbook and Inventory
- Ledger, Cashbook, Inventory and Foreign Currency Transactions
- Ledger, Cashbook, Inventory, Foreign Currency Transactions and Point of Sale
At a bare minimum, you need a Cashbook. You can keep a Cashbook in Excel, or even in a school exercise book.
Generally, a small business can get by with software that can do:-
- Cashbook, Ledger, Bank Reconciliations, Accounts Receivable and Accounts Payable.
Excel, or the free OpenOffice Spreadsheet, make good supporting programs for bookkeeping.
Most bookkeeping software modules provide the ability to export various reports to Excel for
- easy manipulation and personalization
- to produce charts for quick reference or
- to combine different aspects of reporting from one period to the next.