What Is Bookkeeping, and Does My Small Business Need It?

Bookkeeping is the day-to-day work of recording every dollar that comes into and goes out of a business, so the records are accurate and ready when you or your tax preparer need them.

Think of it as keeping score.  A bookkeeper sorts transactions into categories, matches them to bank and card statements, and keeps the running records that tell you how the business is doing.  The results feed reports such as a profit and loss statement and, later, your tax return.

Bookkeeping is about recording what happened.  It is not the same as tax planning or financial advice, though good books make both easier.  Our guide to bookkeeper vs accountant explains where the lines fall.

Bookkeeping can be as simple or as detailed as the business needs.  A one-person business with a handful of transactions each month needs a different setup than one with employees, inventory and credit customers.  Start with the level of detail you will actually keep up, and add to it as the business grows, rather than building a system so elaborate that it gets abandoned.

Your tax return can only be as accurate as your records, and the IRS expects a business to keep records that support what it reports.

When the books are current, you can tell which expenses were deductible, which income has been reported and what you are likely to owe.  When they are not, deductions are missed, income is guessed at and the tax return takes longer and costs more to prepare.

Good books also help outside your tax return.  They show a bank how the business is doing, help you spot slow months, and give you an answer if a notice arrives.  Our guide to business expense deductions shows how the records tie to deductions.

Look for someone who explains what they do, keeps your records private, gives you regular reports and knows how the books connect to your tax return.

Ask how often the books are updated, how you can see them and who to call with a question.  The books remain yours, so make sure you can get copies at any time.  It also helps when the same office that keeps your books also understands your taxes, since the two fit together closely.