Bookkeeping at Home
Bookkeeping Simplified for the Home-Based Business
How to categorize and track your revenues and expenses, and other accounting items, for any small business.
The simplest thing in bookkeeping is to realize that you are tracking your income and expenses. These must be tracked separately, and every item must be tracked.
Tracking Revenue
For the majority of home-based businesses, income is simple to track. There are no requirements to classify different types of income. So, just track your revenues. Make sure that the sales taxes (if any) are tracked separately. For example, if you have a sale of $10, and the taxes are 6%, then the total amount of money you receive from your customer will be $10.60. You must record the $10 in one account (revenue), and the $0.60 in another (sales taxes). There must also be a balancing entry that totals both of these items. This will be the entry that shows the amount went into your company bank account. Note that if you have both federal and state/provincial sales tax, you will need two separate sales tax accounts.
Tracking General Expenses
Expenses are a little more complex. These will have to be divided into several categories. The simplest of these are:
- Cost of Goods Sold: These are the direct costs of items that you buy and resell. If you buy clothing and resell it, it is your cost of the clothing, and any commissions that you pay directly on the sale of the clothes. These should be tracked separately, as well.
- Inventory: This is the cost of items you've bought, but not sold at the time of your financial statement.
- Overhead: This includes all items that cannot be directly traced to a sale. This usually includes your rent, utilities, telephone, management and non-commissioned salaries, professional fees (accounting and legal costs), automobile expenses, office expenses, computer costs, bank fees, and anything else that cannot be directly traced.
- Assets: These are items that are used over a long period of time, and cost (usually) $200 or more. Canada and the USA are different regarding their rules on this, so check with your accountant or online with your local tax agency. Such items include computers, most software, automobiles, property such as land or buildings, video/camera equipment, and more.
- Payroll: This is often more complex, as it includes taxes and other deductions, and may include benefits, expenses, and more. For this reason, it is advisable that you have a good computer program to do your payroll. Another option is to use an outside service that can do your complete payroll for you. An outside service will understand the complete payroll system in your state or province and be able to complete your payroll on a timely basis.
When you are tracking your expenses, you must also record the expenses before taxes in one of the appropriate categories (as above), the sales tax (in the tax account), and the balancing entry must be the withdrawal from the company bank account.
Tracking Auto Expenses
There may also be special expenses that you have to track, such as business use of a personal vehicle. With auto expenses, you should always keep a log of the mileage used for any vehicle. Track each trip’s mileage, its purpose and date. Along with this, make sure you have the beginning and ending odometer reading. If your company is incorporated, then you will reimburse according to government guidelines. If you are a sole proprietor, then you will use the percentage driven for business to determine your overall expenses. In this instance you must keep all receipts for fuel, maintenance, insurance, and repairs.
Tracking Office Rent and Utilities
As a home-based business, you will have to keep copies of all your utilities, telephone (if you do not have a separate business phone), taxes, and rent bills. Make sure you get receipts for rent, if you pay rent. If you own your own home, then you can use a percentage of your mortgage interest and property taxes, so you must keep the relevant statements. Your expenses for your business are based on a percentage. This is the part you can “write off” towards company expenses, and consists of the total costs, as outlined here, times the square footage of your office, divided by the total square footage of your home. Most home offices take less than 10% of the home, so don’t be surprised by a small number. Some states (and Canada) ask that you itemize the home-business expenses, unless you are using an accountant’s financial statement. Either way, you will need to know all of these items to figure out your total home-office “rent and utilities”.
As you can see there are some complexities to bookkeeping. For this reason many people use an outside bookkeeper and/or payroll service. It’s not always difficult, if your business is small enough, but it is good to have someone you can call for advice.
For a free Excel template that you can use for simple bookkeeping click here. Note: this template will need to be modified to your specific needs.
