How to Keep Track of Expenses and Income for Small Business

Tracking income and expenses provides a foundational understanding of a business’s financial health. This practice allows owners to monitor cash flow, assess profitability, and identify areas for growth or reduction. Accurate record-keeping is also essential for tax compliance, ensuring businesses can properly report earnings and claim eligible deductions. By systematically tracking financial transactions, owners gain the necessary insights to make informed strategic decisions regarding pricing, investments, and operational adjustments. This discipline ultimately supports sustainable growth and long-term stability for any small business.

Understanding Income and Expense Categories

Small businesses regularly encounter various types of income and expenses that require diligent tracking. Income primarily represents money received from business activities.

Sales revenue, for instance, comes from selling products, while service fees are generated by providing services. Businesses might also receive interest income from bank accounts or investments. Miscellaneous income could include refunds, rebates, or even proceeds from selling old equipment.

Expenses represent the costs incurred to operate the business and generate income. Operating expenses are regular costs of doing business, such as rent for office space or utilities like electricity and internet. Office supplies, including paper, pens, and printer ink, also fall into this category.

Salaries and wages paid to employees, along with associated payroll taxes, constitute a significant operating expense. Marketing and advertising costs, professional services like legal or accounting fees, and insurance premiums are additional examples. For businesses that sell physical goods, the cost of goods sold (COGS) is a direct expense related to producing or acquiring the items sold. This includes the cost of raw materials, direct labor, and manufacturing overhead.

Travel expenses, such as airfare, lodging, and meals while on business trips, are also deductible. Vehicle expenses, whether for a company-owned vehicle or personal vehicle use for business, can be tracked through actual expenses or a standard mileage rate. The Internal Revenue Service (IRS) sets the standard mileage rate annually.

Choosing a Tracking Method

Selecting the right method for tracking income and expenses depends on a business’s size, transaction volume, and the owner’s technical comfort. Simple manual methods offer a straightforward approach for small businesses with minimal transactions. This can involve using a basic notebook to record daily income and expenses or utilizing pre-printed accounting ledgers. These methods are inexpensive to implement.

Spreadsheet templates, such as those available in Microsoft Excel or Google Sheets, provide a more organized manual option. These templates can be customized to include columns for date, description, category, income, and expense amounts. Spreadsheets allow for basic calculations and sorting, making data summarization easier without significant upfront costs. They are suitable for businesses with slightly higher transaction volumes that still prefer a hands-on approach.

Dedicated accounting software offers more advanced features, automation, and reporting capabilities. Popular options like QuickBooks, Xero, and FreshBooks can link directly to bank accounts and credit cards, automatically importing transactions. This reduces manual data entry and minimizes errors. These software solutions generate various financial reports, such as profit and loss statements and balance sheets, which provide deeper insights into business performance.

When choosing accounting software, consider factors like its monthly subscription cost, ease of use, customer support, and scalability. A system that can grow with the business avoids the need for costly and time-consuming migrations later. Hybrid approaches combine manual tracking for daily, small transactions with periodic entry into a digital system, balancing simplicity with the benefits of automation.

Maintaining Your Records

Consistently recording financial transactions is fundamental to effective record-keeping. Businesses should establish a routine, such as daily, weekly, or monthly, for inputting income and expense data into their chosen tracking system. Each transaction entry must capture specific details, including the date, amount, payee or payer, income or expense category, and a clear description. This ensures accuracy for future reference or audit purposes.

Managing supporting documentation is equally important, as these documents validate the recorded transactions. Businesses must retain original receipts, invoices from suppliers, copies of invoices issued to customers, and bank and credit card statements. These documents serve as proof of purchase and income, and they are essential for tax deductions and reconciling accounts. Physical documents should be organized in a systematic manner, such as in labeled folders or binders, to allow for easy retrieval.

Digital storage offers a convenient and secure alternative for documentation. Businesses can scan physical receipts and invoices, then store them electronically in cloud storage services or within integrated accounting software. The IRS accepts electronic records if they accurately reflect transactions and are accessible for review. Maintaining both physical and digital backups, if feasible, provides an added layer of security.

Regular reconciliation and verification processes help ensure the accuracy of financial records. This involves comparing the transactions recorded in the business’s tracking system against bank statements and credit card statements. This process helps identify any missing entries, duplicate transactions, or discrepancies. Bank reconciliation should be performed at least monthly to catch errors promptly and maintain reliable financial data.

Periodically reviewing financial reports generated by the tracking system offers valuable insights into business performance. A profit and loss statement, also known as an income statement, summarizes revenues and expenses over a specific period, revealing the business’s net profit or loss. Regularly analyzing these reports helps identify spending trends, monitor revenue streams, and inform strategic decisions for future operations. Records need to be kept for at least three years from the date the tax return was filed or due, whichever is later, to comply with IRS requirements.

References

https://www.irs.gov/newsroom/irs-issues-standard-mileage-rates-for-2024-up-1-5-cents-per-mile-from-2023
https://www.irs.gov/pub/irs-pdf/p583.pdf
https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping-for-businesses