This guide will explain the key differences between business and personal bookkeeping and why it’s important for small business owners to distinguish between the two.
What’s the difference between business bookkeeping and personal bookkeeping?
Business bookkeeping means tracking revenue, expenses, debt, and assets in your business on a regular basis. That information gets turned into financial statements, which help you understand your cash flow so you can make smart financial decisions, secure loans, and file your taxes.
Personal bookkeeping, on the other hand, is staying on top of your personal finances. It’s essentially expense management and budgeting. It can help you answer questions like:
“Am I spending too much on eating out?”
“Can I really afford to go to Turks and Caicos again this year?”
“What’s my net worth?”
“What kind of home mortgage do I qualify for?” (Okay, you’ll need a bank to help you with this one. But if you understand your personal expenses, you’ll know how much you can handle in monthly mortgage payments.)
Doing your “personal books” just means tracking your personal spending, and making sure you have a budget that works for your lifestyle and financial goals. It could also mean keeping tabs on your personal debt and assets if you have a personal loan (like a mortgage) or investments like property or a collector’s sports car.
If you want to track your personal finances, Mint.com is a simple tool to help get you started. For something more robust, check out this list of the best personal finance software.
Why is small business bookkeeping important?
If you want to know where your business is currently spending money, how much in taxes it will owe this year, and whether it qualifies for a loan, you need some form of bookkeeping.
You need it to produce financial statements
Financial statements tell you and anyone interested in investing in your business how your company is doing financially. And they’re impossible to assemble without accurate bookkeeping.
You need it to do your taxes
If you’ve never filed a business tax return, it’s important to remember that business and personal tax filing are two different beasts.
To file your personal taxes, you need to know your income and your tax-deductible expenses. If you know those two, you’re pretty much set.
Doing your business taxes is another story. Different industries have unique—and often confusing—tax rules. There are countless traps your business could fall into around tax time: changing tax rates, varying excise taxes, expired credits and deductions, state-by-state sales tax rules, and more.
Keeping detailed books for your business means your accountant can spend less time sorting through the mess and more time saving you money on your taxes.
Further reading: Everything You Need to Know about Filing Small Business Taxes
You need it to get a loan or investment
If you want a bank or investor to give you money, be prepared to show them a set of properly prepared financial statements. The further back your records go, the more confidently these people can give you money, so it’s a good idea to start bookkeeping as early as possible.
Do I need personal bookkeeping?
Generally speaking, no. Unless you earn and spend so much money that you couldn’t possibly keep track of your every expense, what you probably need instead is a personal budget.
But what about flow-through entities?
A “flow-through entity” is a business incorporated so that its income “passes through” directly to the owner as personal income. These companies might be taxed differently than regular businesses, but at the end of the day, they still need business bookkeeping, just like any other business.
So what kind of business bookkeeping do I need?
If you run a small business, you need to start doing some form of bookkeeping, even if it’s just DIY. You can use basic accounting software, budgeting tools like expense trackers, or even just a simple spreadsheet to track your income and expenses. (Our guide to starting your own bookkeeping process can help too!)
Different industries have different tax codes, and different companies have different bookkeeping needs, so make sure to consult with a CPA or professional bookkeeper before you set up your books.
They’ll probably tell you to separate your business and personal bank accounts and credit cards, recommend a specific bookkeeping system, and show you how to record transactions in a spreadsheet or accounting software.