🎯 In 30 seconds: Good books are a habit, not a skill: one business account, a short chart of accounts, receipts captured the day you spend, and a monthly close that takes an hour or two. Then three reports tell you whether you made money (P&L), what you own and owe (balance sheet) and where the cash went (cash-flow statement).
Set-up: account, categories, method
One business bank account and card. Everything business goes through them, nothing personal does. When you pay yourself, it’s a transfer called an owner’s draw (or payroll, in an S corp).
A chart of accounts is your list of categories. Keep it short and match it to your tax return lines. A small service business might use:
- Income: service revenue, product sales, sales tax collected (a liability, not income)
- Cost of goods sold: materials, subcontractors, merchant fees
- Expenses: rent, insurance, vehicle, phone and software, advertising, payroll, payroll taxes, professional fees, supplies
- Balance sheet: checking, savings, accounts receivable, equipment, credit card, loan, owner’s equity, owner’s draws
Cash or accrual. Cash basis records income when money arrives and expenses when paid. Accrual records income when earned and expenses when incurred. Most small businesses can use cash basis for taxes; the IRS generally requires accrual for inventory purchases and sales, though small businesses under a gross-receipts test have options. Many owners keep cash books and simply track unpaid invoices on the side.
The monthly close checklist
- Categorize every bank and card transaction for the month.
- Reconcile each account to its statement, to the cent.
- Match receipts: photo every receipt over a set amount and attach it to the transaction.
- Review unpaid invoices (accounts receivable) and chase anything past due.
- Review bills you owe (accounts payable) and schedule payments.
- Record loan payments correctly: interest is an expense, principal reduces the loan.
- Move the sales tax and income tax set-asides to a separate savings account.
- Run the P&L and balance sheet, and compare with last month and the same month last year.
- Write three lines: what changed, why, and what you’ll do about it.
Reading the three statements: one small shop
A gift shop’s June, illustrative numbers.
Profit and loss (P&L):
| Revenue | $30,000 |
| Cost of goods sold | $12,000 |
| Gross profit | $18,000 (60% gross margin) |
| Operating expenses (rent, payroll, utilities, ads, insurance) | $14,500 |
| Net profit | $3,500 |
Balance sheet (June 30): cash $9,000, inventory $25,000, equipment $6,000 = $40,000 of assets. Credit card $3,000, loan $15,000 = $18,000 of liabilities. Owner’s equity = $22,000. Assets always equal liabilities plus equity.
Cash-flow statement: June profit was $3,500, yet cash fell $1,500. Why? The shop bought $4,000 of extra holiday inventory (cash out, not yet an expense) and paid $1,000 of loan principal (not on the P&L). $3,500 − $4,000 − $1,000 = −$1,500. This is the statement that explains “profitable but broke.”
Three numbers to watch monthly
- Gross margin %: if it slides, prices or costs moved.
- Days of cash: cash ÷ average daily spending. Under 30 means act now.
- Receivables over 30 days: money you earned but can’t spend.
The tool choices and the Friday half-hour habit are in Business Startup; this page is the monthly layer on top.
Bookkeeper, CPA or enrolled agent?
| Who | What they do | Call them when |
|---|---|---|
| Bookkeeper | Records and reconciles transactions, runs reports, often payroll | The monthly close keeps slipping, or you pass a few hundred transactions a month |
| CPA | State-licensed accountant: tax returns, planning, financial statements a lender will accept | Choosing an S election, borrowing, buying or selling a business |
| Enrolled agent (EA) | IRS-credentialed tax specialist with unlimited rights to represent taxpayers before the IRS | Tax returns and IRS notices, audits or payment plans |
Anyone paid to prepare returns needs an IRS PTIN, but many preparers hold no credential. The IRS directory lists those who do.