Edition: Service-Based Businesses

The goal of this document is for the reader to, in less than five minutes,

understand the purpose of bookkeeping for their business. This is a

beginner’s guide to bookkeeping.

Bookkeeping is a set of tasks to track and manage how your business spends

and makes money.

You want to do a good job at bookkeeping for a few reasons:

• To have accurate data for taxes

• To know who OWES YOU money (also known as “accounts receivable”)

• To know who YOU OWE money (also known as “accounts payable”)

• To understand how you spend your money

Bookkeeping is a set of basic, on-going tasks:• Sending invoices and proposals to customers

• Marking invoices as “paid” after receiving payment

• Following up with customers that have past due, unpaid invoices

• Paying yourself, employees and contractors, then tracking these payments

• Paying your own bills and categorizing the money you spent

• Paying estimated taxes (if you are considered self-employed)

• Ensuring your transactions are accurately recorded

Bookkeeping is not tax preparation, that’s totally different and we suggest

finding an awesome accountant and/or CPA to help with that. We’ll talk about

that in a few minutes.

Accounts ReceivableAccounts receivable is a debt owed to your business. It is the money you

make from your customers and clients. This process involves sending out

invoices, marking them as paid as you receive payments for them, and

following up on past due or unpaid invoices.

For those who have a hard time following up on invoices, we suggest

ZenCash.com, a service that manages your accounts receivable by sending

out reminders to clients with unpaid invoices. They’ll even send ‘thank you’

notes to your clients who pay on time, and will help manage collections for

those clients who aren’t as prompt.

Accounts PayableAccounts payable is a debt owed by your business. This process involves

paying for expenses like advertising, travel, wages, etc. You should categorize

these expenses so that 1) you can see how you’re spending your money and

2) your accountant can figure out what expenses are deductible come tax

time.

According to the IRS, “Business expenses are the cost of carrying on a trade or

business. These expenses are usually deductible if the business is operated to

make a profit.”

Now how about those personal or living expenses that you also use for

business?

“Generally, you cannot deduct personal, living, or family expenses. However, if

you have an expense for something that is used partly for business and partly

for personal purposes, divide the total cost between the business and

personal parts. You can deduct the business part.” That’s straight from the IRS

website. In the case of a home office or a cell phone that is used for both

personal and business, you CAN deduct the percentage that you use solely

for your business.

You can get more details here: http://www.irs.gov/Businesses/Small-

Businesses-&-Self-Employed/Deducting-Business-Expenses

If you think you may need help with your spending habits, consider using

budgets. Here’s a blog to help you get started: http://

blog.lessaccounting.com/p/dont-fear-the-budget

Paying yourself and estimated taxesEstimated taxes are taxes paid on income that is not subject to withholding. In

other words, any income that hasn't already had taxes automatically

deducted. If you are operating as a freelancer, read our blog about estimated

taxes at: http://blog.lessaccounting.com/p/getting-started-with-estimated-

taxes/

We recommend EasyEstimatedTaxes.com.

Paying employees and contractorsThere are many ways to pay your employees and contractors. We recommend

using SurePayroll.com. They’ll calculate and pay the various taxes for your

payroll, therefore saving you a lot of time and frustration.

Be sure you collect an I-9 (Employment Eligibility Verification) for each contractor you work with. There are new regulations from the IRS about collecting I-9 forms. Also, collect a W-4 from any employee you pay. It’s a good idea to get these forms filled out before you remit payment to contractors or employees. There are advantages to having the forms

completed prior to payment such as ensuring that the person you are paying is legally allowed to work for you, and not having to chase down all the people that have worked for you, throughout the year, at tax time. We recommend using RightSignature.com for digitally collecting and storing these documents, but you can send and collect I-9 and W-4 forms manually as well..

Not sure of the difference between an “employee” and a “contractor”?

Read this: http://blog.lessaccounting.com/p/contractor-vs-employee/

Finding and Fixing DiscrepanciesSometimes your books get messy and your balances don’t match. This can be

fixed by “reconciling” your bank accounts. Using the bank statement you receive

each month, you compare the transactions in your accounting software to the

transactions in your actual bank account. A reconciliation ensures that the

transactions in your bookkeeping application match your bank account and no

silly mistakes have occurred.

We recommend doing bank reconciliations on a monthly basis once you have

received your bank statement. This ensures that your data has been double-

checked and confirmed as accurate up until the date of the last reconciliation.

Working with an AccountantFirst you need an accountant, someone to help with tax preparation and even

do tax planning. Tax planning can save you money!

List of reports you should provide to your accountant:

• General Ledger: This is a list of all financial transactions made by the company

• Balance Sheet: This helps the accountant know the financial position of your

company on the date of the report

• Profit and Loss Statement: This shows how much money you earned and

spent, equaling your net income, or bottom line

• Receipts: Although you may not be required to provide receipts for purchases,

you should have them organized and ready to show if necessary

Other common info you should be ready to provide if applicable:

• Payroll Report: This is a statement showing all earnings, withholding, etc. paid

to employees or contractors

• Mileage Report: This should be a detailed report containing a log of all

mileage driven.  It should show the date, destination, odometer reading at the

start and end, and purpose of the trip  

• Documentation for Other Sources of Income: This will include any 1099s,

W-2s, K-1s, etc. received

• Documentation for Estimated Tax Payments: This should include a list of

payments, who they were made out to and the date they were paid

Of course, every business situation is different so you should speak to your tax

preparer in regard to the specific things that he/she will need from you.

Frequently Asked Questions:

How long does bookkeeping take?

Bookkeeping varies from business to business. Larger companies typically

have a full-time accountant managing accounts payable and receivable and

double checking everything regularly. These business send out hundreds or

thousands of invoices, have lots of people to pay, and are managing large

amounts of money.

Then there are smaller businesses (including sole proprietors and freelancers)

who don’t spend nearly as much time on their books. They send out fewer

invoices, have fewer bills to pay, and have less accounts to reconcile. This,

coupled with time-saving apps like LessAccounting.com (and others that we

have mentioned), can cut the amount of time one spends on bookkeeping

down to just a few hours a month.

Do I need to hire a full-time bookkeeper?

It depends on the size of your company. As mentioned above, if you have a lot

of clients, lots of bills and lots of money to track, you might want to bring

someone on to help. In many other cases, though, you should be able to

manage your day-to-day bookkeeping yourself. It’s always good to have an

accountant that you can reach out to with questions. Come tax time, have your

accountant look over your work and help file your taxes. If you kept up with

your bookkeeping tasks all year, this should be easy for both parties.

I’m just starting out my business, I don’t make a lot of money, or I’m just

doing this as a hobby. Do I really need to do bookkeeping?

Yes. At the very least, every business should always track how much money it’s

making and spending, even if you’re just tracking this in a simple Excel

spreadsheet. If you’re just starting out your business, this is the best time to

put together a bookkeeping workflow that you understand and can stick with.

Start with the basics and build upon that as your business grows.

Bookkeeping is an essential part of running your business, but it’s also one of

the least exciting parts of being a business owner. This is why we recommend

using apps that will not only help keep you on top of your bookkeeping tasks

but also save you time, money, and a few grey hairs. After all, the less time you

spend on bookkeeping, the more time you have for doing the fun stuff, like

actually making money.

Apps we love + recommend:• LessAccounting.com: For cloud accounting, including expense tracking and

invoicing. Super simple interface and features.

• EasyEstimatedTaxes.com: For calculating and filing estimated taxes

• ZenCash.com: For managing your accounts receivable

• RightSignature.com: For filling out W-2s and W-9s

Claim your 60 day free trial

Use the coupon code “service_based_ebook” for your extended free trial account.

LessAccounting.com is simple accounting software for small businesses.

• Expense Tracking• Proposal Sending

• Invoice Sending• Project Based Reporting

• Contact Management• Receipt Uploading

• Simple Interface• Unicorn Powered Servers

LessAccounting.com is made for awesome businesses.