One of the hallmarks of being a contractor and having your own business is that you are required to keep your business and your personal finances separate. At the most basic level, you must open a business bank account and keep a record of financial transactions.
While it may sound daunting at first, it’s quite simple; you may find that once you’re set up, you are able to better track your expenses, save for retirement, and ensure you have enough set aside to pay your taxes.
Here are some options for setting up the books for your business.
What is the difference between bookkeeping and accounting?
Bookkeeping is simply maintaining a record of your transactions. In old-school terms, it’s your checkbook register; these days, it’s usually bookkeeping software.
Accounting is what happens with the recorded data: filing taxes, financial statements, forecasting, and understanding the impact of financial decisions.
Accurate accounting cannot not happen without accurate bookkeeping, so it’s critical that your bookkeeping is set up properly so that your taxes can be correctly filed when it’s time. There may be financial penalties for errors, so it is imperative that you set yourself up for success.
Should I do it myself or hire it out?
When considering whether to manage this part of your business yourself, the biggest question to ask is this: How much is your time worth? While bookkeeping is fairly straightforward, it can be tedious and time-consuming, and oftentimes, if you do the math, you may find that those hours would be better spent billing a client.
If you feel like it might be worth the time to do it yourself, the next question to ask yourself is: Are you willing to balance your checkbook?
Your bank statements are considered the “record of truth.” In most instances, your project will direct deposit funds to your bank, which is a record of income. And when you pay for things from your account, those are records of expenses.
Both income and expense transactions must be categorized. For example, expense categories include the following: