In any business, it is important to record all financial transactions. You need to know your total income as compared to your total expenses to know whether your business is profitable. Additionally, it is your responsibility to provide documentation that supports income and expense numbers you use when filing your annual income tax return.
Any type of record-keeping method that works for you is acceptable. It can be two notebooks and two envelopes -- one of each for income and one of each for expenses -- or a simple computer accounting program. Notebooks specifically used for financial entries, called journals and ledgers, are available at office supply stores. If you are using notebooks, your record keeping for a sale may be as simple as recording date of sale, item sold and cash received. Similarly, for an expense you would record the date of the expense, what the expense was and how much you paid to whom. The envelopes can be used to hold your receipts, providing documentation of your cash transactions at tax time.
After you record a cash receipt in your journal or computer, retain all records of the transaction. The documentation could be a copy of a receipt given to a customer, a bank deposit slip or a cash register tape. Any cash you spend to support your business is an expense and should be recorded in your expense journal. Retain receipts you receive for items you purchase for or use in your business, such as receipts from a supplier or a cell phone company.
Prepare Your Financial Statement
At month's end, prepare a simple income statement. Total your income journal entries to calculate your gross income -- business income before subtracting business expenses. Total your expense journal entries. Subtract total expenses from your gross income to calculate your net income. If the net income is a positive number, your business made money. If the net income is negative, the business lost money.
Monitor the Progress of Your Business
Recording income and expense journal entries and keeping proof allows you to show your income. While it is helpful to keep an eye on net income each month, very few businesses rely solely on monthly figures to determine the overall success of their business. More commonly, quarterly and annual figures are used. Depending upon how detailed your entries are, they can also show which items are selling well and perhaps where changes need to be made to improve the business’s profitability.
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