Proper Bookkeeping for Small Business Taxes

For the purpose of small business taxes, it is a good idea for the small business owner to know in detail how to do proper bookkeeping and how to prepare a Profit & Loss (P&L) statement. The IRS has a good outline on their website that describes what they expect. Even if the small business owner uses a bookkeeper or accountant, they should have this knowledge so they can monitor their own books and ensure that the small business taxes are handled correctly.

VA-Interactive.com proposes that a small business owner should ask him-or-herself, "Exactly how are my products and services affecting my small business? How much money am I actually making because of those product and services?" These questions, as well as others, are what your finished P & L statement should answer. It is essentially a roadmap of your small business thus far, telling you and any shareholders you have whether you are gaining or losing money, and will encompass details that help you single out where profits or losses are coming from.

VA-Interactive.com has a very in-depth guide and a few useful tools in an article (http://www.va-interactive.com/inbusiness/editorial/finance/intemp/income.html) published on their website, which you may make free use of to help come up with a Profit and Loss statement. The article breaks it down in to ten steps that help the business owner organize his or her bookkeeping and create the P&L statement, which in and of its self, is good bookkeeping practice.

The steps that the process is broken down in to are: Elements of Income, Income Determination, Changes in Estimates, Forms of the Income Statement, Cost of Goods Sold, Operating Expenses, Other Revenues and Gains, Other Expenses and Losses, Income Tax on Continuing Operations and Resources. The first four steps embody the bigger picture. The Elements of Income, for example, help you determine exactly what income is. The second step, Income Determination, helps you see your profits or losses - revenue vs. expenses.

Steps five, through nine go over various forms of revenues, expenses, gains and losses. The costs of goods sold, operating expenses, other revenues and gains, other expenses and losses and taxes, respectively. Going through these steps of creating a P&L statement will help you narrow down and determine exactly what is coming and what is going out, and once you have that determined, you can see what's costing your business money and what's making your business money. For example, if you determine that your business is taking a big loss because it spends too much on bread, you may want to find an alternative source of bread, to lower operating expenses.

The importance of a P&L statement is that it helps you streamline your business operations, both on day-to-day and a long-term level. It outlines exactly where money is coming from and where it is going. If you are making a profit, you will see exactly what is bringing in the money (or saving it) and if you're making a loss, you can see exactly where the excess money is going - what you're spending more on than you probably should be. There are tools on the internet, such as the ones at VA-Interactive.com, which are invaluable in helping you prepare these statements. For help with questions about proper bookkeeping for a small business or small business taxes, please contact us.